Martin Lee @ Sg
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OCBC Preference Shares Details

There has been considerable interest in the preference shares offered by OCBC, so I thought I’ll post some of the details here.

OCBC Preference Shares Offering

Price : S$100 per share

Total number of shares : 10 million

Value : S$1 billion

Dividend yield : fixed at 5.1% p.a.

Credit rating : Aa3 from Moody, A+ from Fitch and A- from S&P

Listed date (expected) : 30th July 2008

Subcription details:

Phase 1 (Placement)

9.5 million shares from 2nd June 2008 to 14th July 2008 to be placed via an application form (already fully subscribed).

Phase 2 (ATM offer)

0.5 million shares from 16th July 2008 to 28th July 2008.

Minimum subscription is 200 shares ($20,000). Thereafter in multiples of 100 shares ($10,000)

Frequently Asked Questions

1. Is the dividend of 5.1% guaranteed?

The payment of dividends on the preference shares is subject to declaration by our Board of Directors. As the preference shares rank ahead of ordinary shares, OCBC Bank would have to declare dividends on the preference shares if it declares dividends on the ordinary shares. Since the end of World War II, OCBC Bank has never stopped paying dividends on its ordinary shares.

2. Is the dividend of 5.1% calculated based on issue price of S$100?

The dividend of 5.1% per annum will be paid on a semi-annual basis, calculated on the issue price of S$100 per preference share. The dividend amount is not dependent on the prevailing market price of the preference shares.

For example, if you subscribe for 200 preference shares at S$20,000, the dividend payable to you on each dividend payment date will be approximately S$510 on 20 June and on 20 December of each year, which means a total amount of S$1,020 per year.

Please note that the first proposed dividend payment on 20 December 2008 will be less because of the shorter period for computation of dividend from 29 July 2008 to 19 December 2008.

3. Do I need to pay tax on the dividend received?

If you are a resident in Singapore, or if you are a corporate entity in Singapore, the dividend you receive will not be liable to any further Singapore tax as it is tax exempt. You will receive the 5.1% dividend without any tax deduction. If you are not a resident in Singapore, please seek your own tax advice.

4. What are the potential risks involved in this investment?

The key potential risks are summarised below:

  • Dividend payment is not cumulative. If OCBC Bank for whatever reasons stops payment for one year, the amount not paid will not be payable in the following year(s)
  • The Bank has the right but not the obligation to redeem the preference shares, and preference shareholders have no right to call for their redemption. Preference shareholders are however free to sell in the market
  • The price of the preference shares may fluctuate depending on prevailing market conditions, including interest rates, as well as the credit standing of the Bank
  • In an unlikely liquidation scenario, the preference shares will rank in priority to ordinary shares but junior to all depositors and other creditors (including holders of subordinated debt) of the Bank
  • The market for the preference shares may not be sufficiently liquid or active. The preference shares may trade lower than the initial issue price

5. Will OCBC Bank redeem the preference shares? Will there be any change in the dividend rate in the future?

OCBC Bank may redeem the preference shares under the following circumstances, subject to, amongst other things, approval of the regulatory authority:

  • on the date falling 5 years after the issue date, and on each dividend payment date thereafter, although the Bank is not obliged to do so. If the Bank should decide to redeem, it will pay the investor the issue price of S$100 for each preference share, plus any dividends payable up to the redemption date,
  • if the preference dividend becomes subject to tax, due to changes in the Singapore tax laws, or
  • if the preference shares do not qualify as capital of the Bank

If the Bank does not redeem, the dividend rate will stay at 5.1% and there will be no change in the dividend rate.

6. Will the preference shares be traded in the market?

Yes, you will be able to trade the preference shares once they are listed on the Main Board of the SGX-ST on or about 30 July 2008. Market price of the preference shares may be above or below the issue price.

For more details, you can download the press release and prospectus from OCBC.

OCBC Preference Shares Media Release

OCBC Preference Shares Prospectus

Please note that dates given above are subjected to change and can be bought forward depending on the demand. Investors who wish to find out more about the shares can visit any OCBC bank branch, visit their website at www.ocbc.com or call them at 1800-4386088.

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Leave a Comment:

16 comments
Max says 15 years ago

Do you think the market is wrong for valuing fixed payment of 5.1% forever higher? Wouldn’t a floating rate with +2.5% be more favorable to holders ? Unless, everyone is expecting interest rate to remain significantly lower than 5.1% forever.

Reply
    lioninvestor says 15 years ago

    Hi Max,

    Don’t forget if the floating rate gets too high, they can always redeem the preference shares.

    Therefore, the downside risk is more than the upside risk.

    Reply
      Max says 15 years ago

      Thanks lioninvestor for your viewpoint which most likely explains the price discrepancy exist today. But i thought the downside risk is worst for investors in a rising interest rate environment where investor can be locked-in perpetually. Just my 2 c.

      Reply
        lioninvestor says 15 years ago

        Hi Max,

        For the floating rate preference shares, there is a possibility they will get a lower interest rate in the future. And if the rates rise, they might not get the higher interest rate.

        That is what I meant when I said the downside risk is more than the upside risk. To put it another way, they get the downside but not the upside.

        Reply
francis mok says 15 years ago

There are 2 preference shares paying 5.1% but I notice one of them is always higher than the other.
Can you explain where the price difference. Or more appropriately, what is the difference between the 2 types.

Thanks.

Reply
    lioninvestor says 15 years ago

    Hi Francis,

    one pays a fixed 5.1% forever. The other (the one issued by OCBC capital) pays 5.1% until Sep 2018. After 20th September 2018, the dividend rate will no longer be fixed at 5.1% p.a. Instead, the rate will be tied to the 3-month Singapore dollar swap offer rate plus 2.5%.

    And of course, the different coupon payout dates might influence the pricing as well. One pays out in Jan/Dec, the other in Mar/Sep.

    Reply
lioninvestor says 15 years ago

Hi James,

The traded price of the preference shares is subject to market forces. Among other things, it should mirror closely bond prices.

Perhaps this post will make things clearer.

http://www.martinlee.sg/preference-shares/

If both shares are redeemed at par value, the one with the higher yield will of course be better.

Reply
james says 15 years ago

Hi

DBS preference share is paying out 6%
OCBC preference share is paying out 5.1

Let say the OCBC trade at $103.xxx
If I hold the share more that 3 years to 4 years the DBS will be more profitable.
Also DBS has more credit rating then then OCBC.

Will this be true.

Reply
lioninvestor says 15 years ago

Hi Tim,

I just wrote a new post on preference shares. Hope it answers your questions.

If there are still doubts, feel free to ask again.

Reply
tim says 15 years ago

Hey thanks for some clarifications. Im going to ask some questions which I hope u can help:

1) at the end of 5 years, if OCBC redeems,it can offer subscribers $100 or less than that? In what circumstances it will offer less than the issue price?
2) understand that it is not principal guranteed much like share purchase why would this $100 price not trade at the current ordinary price levels of $8.60 range? Is there a different class of trading market?
3) if OCBC redeems at any time at what price it will offer at redemption and what will the dependent factors be?

Maybe the answers to these questions may also be useful to other people. First time trying to understand preference share investing.

Reply
lioninvestor says 15 years ago

Hi Tang,

I can’t really advice on whether the preference shares is suitable for you as it will depend on your financial circumstance, risk profile and investment objectives.

Good points raised for your questions.

I will answer them in a separate post as I feel the information will also be useful to other people.

Reply
lioninvestor says 15 years ago

Hi Benjamin,

Thanks for sharing. The FAQ was actually given to me by OCBC, so it should be coherent with their sales brochure.

Yes, SGS bonds is safer. However, based on their current market prices, the yields range from 0.8% p.a. for a 1-year maturity bond to about 3.87% p.a. for a 20-year bond.

This is nothing close to what the OCBC preference shares is offering.

And as with all fixed income instruments, interest rate risk will always be there.

Reply
Tang says 15 years ago

Hi Martin,

What do you think about this OCBC preference share? Is it worth taking up? It sounds to me that it is really a good deal with fixed income at relatively low risk.

What I dont really understand is that once it is listed on SGX, will the preference share price following the ordinary share price? Also does it mean if the preference share price goes up in the future and when we sell it in the market, what our return will be profit + fixed dividend payout in the past, is that so? If we are bullish on OCBC share price, I guess this will be a good chance to subscribe the preference share?

>> If the Bank should decide to redeem, it will pay the investor the issue price of S$100 for each preference share…

According to this statement, if OCBC were to redeem the preference share in future, it will be $100/share. If the price in the market is higher than $100/share, wouldnt the investors better off just by selling off in the market?

Sorry for shooting so many questions as I am totally new to the preference shares and thanks in advance for your advise 🙂

Reply
Benjamin says 15 years ago

Informative, with content coherent with OCBC’s sale brochure.
A few points to add.

1. The previous OCBC preference shares (@4.2% dividend) released in 2003 were not redeemed upon maturity; as it was “trading above par” according to OCBC in Business Times. But it’s more likely because they are cheaper funding; as compared to 5.1% in the present issue.

2. As with fixed dividend/coupon products. Interest rate risk (and inflation risk in particular) should be a major concern.

3. In line with that, a comparably safer and more liquid product: SG Govt bonds, last paid out coupons in excess of 5% for their 5 year tenure bonds as recently as 1998.

That’s some food for thought.

Reply
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