Martin Lee @ Sg
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DBS Preference Shares 2010

DBS Bank will be offering a new tranche of preference shares for subscription.

Up to S$500,000,000 in aggregate liquidation preference of 4.70% non-cumulative, non-convertible and non-voting preference shares callable in 2020 in the capital of DBS Bank will be offered, with an option to increase the offer to up to S$800,000,000 in aggregate liquidation preference of preference shares.

DBS preference shares at the issue price of S$100 per preference share will be offered to the public in Singapore through electronic applications made through ATMs belonging to DBS Bank (including POSB), Oversea-Chinese Banking Corporation Limited and United Overseas Bank Limited and its subsidiary, Far Eastern Bank Limited or the Internet Banking website of DBS Bank.

An application for the preference shares under the public offer is subject to a minimum of S$10,000 (or lots of 100 preference shares) and in integral multiples thereof. The public offer will open at 9.00 a.m. on 11 November 2010 and close at 12.00 noon on 18 November 2010, subject to changes as may be announced.

They are expected to be listed on the Main Board of the Singapore Exchange Securities Trading Limited from 23 November 2010, and will be traded in board lots of 100 preference shares.

The preference shares carry a dividend rate of 4.70% per annum, payable semiannually in arrear on 22 May and 22 November each year, subject to certain conditions. The preference shares are perpetual securities with no maturity date and are not redeemable at the option of the holder of the preference shares. DBS may redeem the preference shares for cash under certain circumstances.

The DBS preference shares OIS (prospectus) can be found here:

DBS preference shares Offer Information Statement

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52 comments
QAZ says 9 years ago

I thought you couldnt touch these for ten years? So you can sell on open market and make money from them other than dividends if you wish? ie if they were to rise to 110 you could sell at that price and take the profit?

Thanks 🙂

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kambeng says 9 years ago

Now that I’ve got the pref shares, I’m worried. Wonder what’s the best exit strategy?

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    lioninvestor says 9 years ago

    Dear Kambeng,

    If you don’t like them, you can always sell on the open market. Last traded price was 102.440.

    Reply
colin says 9 years ago

What if i pick this NCPS after few (lets say 2) dividends payout? Am I losing anything other than the 2 payout?

If DBS choose to redeem back at 2020, my total return is the price it is trading + (18 * 4.7%)? (The figure 18 comes from if DBS did payout every half year as promised until 2020)

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    lioninvestor says 9 years ago

    Dear Colin,

    Technically you can get back 100 + 18 x 2.35.

    But note that the dividends are non-guaranteed. DBS can choose not to pay a dividend if they do not pay any to their regular shareholders.

    Reply
colin says 9 years ago

What if i pick this NCPS after few (lets say 2) dividends payout? Am I losing anything other than the 2 payout?

Reply
QAZ says 9 years ago

Hi there,

Thanks for excellent info…

Newbie question but do these make or lose money according to the stock price i.e. if after 10 years they are valued at 200 then DBS have to pay you 40,000 in order to excerise redeem?

Thanks 🙂

Reply
    QAZ says 9 years ago

    thats of course if you bought 200

    Reply
    lioninvestor says 9 years ago

    QAZ,

    DBS will redeem at $100.

    Reply
Jasmin says 9 years ago

When will we know the “result” of this subscription? Thanks.

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    lioninvestor says 9 years ago

    You should see it in your CDP on Monday. Expected to start trading on Tuesday.

    Reply
Raymond Lee says 9 years ago

Current listed DBS 6% Preference Share dividend rate will go down to 3mth SOR + 2.28% after 15 May 2011. Based on current 3 mth SOR of 0.27%, dividend after 15 May 2011 will be 2.55%(0.27+2.28).

Why DBS want to issue new 4.7% Preference Shares and call in 6% preference shares (paying lower 2.55% next yr) ?

Do we miss out something that DBS already know coming next year ?

Pls enlighten,
Thanks

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    VSL says 9 years ago

    Hi Lion,

    This is precisely my predicament. I’m sure I’m missing something but don’t know what it is.

    It would be in DBS’s interest to extend the existing 6% Pref Shares after 15-May-11 and pay existing shareholders 2.55% pa dividend. So why does DBS want to issue new Pref Shares now, thereby incurring additional issuance costs and paying 4.7% dividend?

    And why does DBS want to “protect” us for 10 yrs @ 4.7%, instead of a short 3 or 5 yr period?

    It appears that DBS is doing us investors a favour, but why?

    Reply
      IOP says 9 years ago

      Hi VSL,

      Let me try to take that question. If DBS decides to hang on to the 6% floating rate issuance, it is also taking on the risk of rising interest rates in the future.

      Currently SIBOR is low, which makes sense for them to hang on. However, if interest rates rise in future, which will certainly happen, they may have to pay more than 4.7%.

      At that time, they would of course be unable to refinance at their current issue of 4.7% because no one would buy into it when they are able to get better dividends elsewhere.

      With regard to the second part of your post, I dont know for sure, but the 10 year period appears to be a norm, with UOB’s previous issue also having a min. 10 year lock-in period. OCBC’s however was 5 and then 10.

      DBS is definitely not doing us a favour, haha.

      Reply
      lioninvestor says 9 years ago

      Hi Raymond and VSL,

      I have not seen the offer document for the old tranche. Perhaps DBS prefers to have a fixed rate payout than a floating one.

      The SIBOR is at close to historical rates now, even 2-3% is on the low side. So 2.28%+ SIBOR can go higher than 4.7% quite easily in the future.

      Between now and May 2011 is a long time. If DBS tries to wait till then and interest rates have gone up by then, they might not be able to sell out the 4.7% as easily. And sentiment is also very buoyant now. It’s much easier to raise capital when the mood is good.

      If the callable period is too short, institutions might be less keen on the issue.

      Reply
Lai Fong says 9 years ago

Hi,

Just need to ask a few questions:

1) Read that the share is “capital protected” until DBS exercise the option to buy back the share 10 years later. Does that mean that , in layman terms, you put in 10K , you will get back at least 10K no matter what happens to the economy, unless DBS close business and shut down of course?

2) What happens after 10 years? If DBS do not exercise the option to buy back the shares, does it mean that we will have to hold on to the shares and can not sell it into the open market until DBS exercise the option to buy back the shares? Can we sell the shares in the open market after 10 years if DBS does not exercise the options to buy back the shares?

3) We must hold on to the shares for at least 10 years right for it to be profitable for us?

I am asking because my dad is asking me to buy for him on-line. Thought of finding out more for my own knowledge and for his sake (before anything bad happens to his retirement funds lor). His risk appetite is, he die-die must get back the capital amount he invested.

Really a newbie at buying preference shares, so forgive me if I seem to be asking stupid questions.

Reply
    lioninvestor says 9 years ago

    Lai Fong,

    1) IF DBS chooses to redeem from you, then you get back your 10k. If they choose not to, you have to sell on the secondary market. There is no guarantee on the prices you will get on the secondary market. If they close down, it is possible to get back nothing.

    2) You can sell on the open market any time you wish but prices will be based on demand and supply. You can also choose to hold.

    3) Well, if you can collect one dividend payout, and sell the PS at cost, then it becomes profitable. You don’t have to wait for 10 years.

    Preference shares is more suited for those who want the dividend but won’t need their capital. You can get back less than your capital if you sell your preference shares at the wrong time.

    Reply
Jon says 9 years ago

Hi Lion Investor

My question is this.. Assuming that in 10 years time, when interest rates go up to more than 4.7%, say 8%

1) Wouldn’t the Pref share be selling below par, because nobody in the secondary market would want to buy it?

2) DBS would be happy not to redeem it because they are paying us at a lower dividend rate of 4.7% vs what can be paid in the market ie 8%

3) The only way out for investors who have invested their money in this Pref share to attain the 8% is to suffer a capital loss (and opportunity costs) by selling it at secondary market (notwithstanding that there may not even be demand for it)

Thanks for your response!

Reply
    lioninvestor says 9 years ago

    Yes Jon, you are right.

    Investors of course will have the option of holding on to it.

    Reply
CK says 9 years ago

Can it be confirmed that if DBS wish to buy back at end of 10 years , we will get back 100% amount invested in 2010 for the preference shares.

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Claudia H says 9 years ago

thanks alot both!

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Claudia H says 9 years ago

i suppose it depends on under what conditions can your friend not pay you the dividend. Whether you think rates will remain low.

Actually, I am trying to understand what drives the the price of the preference share since it does not have a maturity date. For bonds, the pricing mechanism works based on the remaining duration of the bond. However, for the preference share with no maturity, what benchmark would investors compare the yield of 4.7% vs?

Reply
    Norman Tsai says 9 years ago

    Hi Claudia,

    Supply & Demand… these two drive prices for preference shares in the secondary market after the issue.

    You have to understand that this preference share is a hybrid instrument and you cannot compare it directly with bonds, which is a different instrument altogether.

    This preference share is basically like an equity (share) rather than a debt (bond), only that you get “preferred” status when it comes to dividend payout whenever that happens.

    It had to be structured like an equity because that is the Tier1 capital criteria from BIS to banks (This issue of preference shares is for Tier1 capital and thus the reason why this particular issue is non-cumulative).

    How other investors will determine the price of the preference shares in the secondary open market after the issue basically follows the general equity market and boils down to this principal:

    “Price is a level where you make an exchange, value is whether it is worth it.”

    There is basically no benchmark because there is no obligation involved, unlike bonds where the entity has to make good certain repayment over a finite period.

    These finite obliged parameters (coupon rate & maturity) then make up the benchmark you are looking for. For this particular issue of preference shares, there is no such benchmark.

    Cheers 🙂

    Reply
    lioninvestor says 9 years ago

    Claudia,

    You might want to read this:

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

    And as Norman pointed out, market sentiment will also drive the price.

    Reply
boonlaysg says 9 years ago

maybe a simple illustration explains things.

Imagine u lend a friend $100 to set up a business. he pays u 4.7% in interest per year and gives u an IOU. he tells u – don worry, for 10 years i will not redeem the loan and u will get the interest. but 10 years later, i have the option to return the $100 back to you if I can borrow at an even cheaper rate in 10 years time.

In the meantime, he create a secondary market to allow 3rd parties to trade the IOU. He tells u that you can sell your IOU in the open market if you need the cash.

However the price of your IOU might be lesser than $100 if other lenders are lending money at higher interest. So u have to pray hard that lending rates are low when u need the cash and have to sell the IOU.

In the meantime, your friend pays you the 4.7% only when his business does well. And yes, for years which his business is not doing well, he reserve the right not to pay you the interest.

If lending rates remains low or drops further, your IOU becomes valuable. unfortunately, the good times don’t last long cos when that happens, your friend will use the cheap money to pay you and take back the IOU after 10 years. and when you take back your $100 and relend to someone else, it will be at a low rate too. ouch!

So will you still lend your friend this money?.

Reply
    lioninvestor says 9 years ago

    Dear boonlaysg,

    This is quite a good analogy.

    I would like to offer another view. Some people are already putting their money with this friend for safekeeping, earning next to nothing interest…..So, it MIGHT be worthwhile to convert a small portion of it to the loan.

    Reply
Jasmin says 9 years ago

Is there any difference between this DBS pref shares and the OCBC & UOB pref shares besides the dividend yield?
All financial instruments come with some risk and the question is whether you can accept this risk.

Reply
    lioninvestor says 9 years ago

    Dear Jasmin,

    Need to read the actual offer information sheet to compare. I remember some have yields that change after x number of years.

    Reply
Claudia H says 9 years ago

Hi

But if DBS does not redeem, they will still be obligated to pay the 4.7% dividend p.a?

Given the current low interest rates environment, likelihood of rates > 4.7% is high. However, given that there is no maturity, do you know what is the benchmark tenor? (Short term rates may not > 4.7% but 10yr rates would prob be shoud Fed hike rates 1-2 yrs down the road…)

Also how liquid are these preference shares in the secondary market?

Reply
    lioninvestor says 9 years ago

    Dear Claudia,

    There are certain conditions whereby the dividends are not payable. These conditions apply even before the ten years are up.

    One of them is if they do not pay their normal dividends to shareholders, then they can choose not to pay the preference shares dividends.

    You can refer to page 9 of the OIS.

    I have added a link to the OIS on top.

    For liquidity of the preference shares, you can refer to the liquidity of the preference shares of the three local banks as a reference.

    Reply
Daniel P says 9 years ago

I believe the preference shares are callable from 2020 at DBS option. So if interest rates shoot up above 4.7%, likely you will suffer a lose if you sell it in the open mkt.

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Norman Tsai says 9 years ago

Hi all,

Do know what you are getting into and not be blinded by the higher than average return. Usually higher return is to compensate higher risk.

There’s a writeup by Goh Eng Yeow, ST Markets Correspondent in The Straits Times Blogs titled “Considering DBS Pref shares”. Source: http://blogs.straitstimes.com/2010/11/11/considering-dbs-pref-shares

One has to ask what’s this fund-raising for? (This is after all a fund-raising exercise by DBS) and the official answer at DBS states:

“The Preference Shares are intended to qualify as Tier 1 capital of DBS Bank. The purpose of the issue is for the DBS Group to exercise the calls on its outstanding Tier 1 instruments which are callable in 2011 (subject to regulatory approval), and to strengthen DBS Bank’s capital base so as to support its growth initiatives.” Source: http://www.dbs.com/newsroom/2010/press101110.aspx

This is basically a refinancing exercise but now with cheaper money because this issue at 4.7% is to cover the last issue back in 2001 at 6%. Source: http://www.dbs.com/investor/prefshares/default.aspx

Non-cumulative, non-convertible, non-voting, no maturity date and are not redeemable at the option of the holder… this particular hybrid instrument (preference share) exposes you to all the risks of a common stock, yet tie your hands behind your back during difficult period (because you can’t convert nor vote) and may pay you less than a corporate bond (any dividends passed are lost forever if not declared). Source: http://en.wikipedia.org/wiki/Preferred_stock

May be an ok investment during good times… but right now we are anything but good. Its your money, its your call. For me, no thanks 🙂

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kez says 9 years ago

Will the p share be subjected to allotment (ratio) in the event of over-subscription similar to share ipo eg. 1:99, 4:99, 10:99 etc etc.

Also, will you be allotted in full according to the amt you applied for or will it be like share ipo too eg. 100-900 shares applied -> get 100 shares etc etc?

Reply
    lioninvestor says 9 years ago

    The Issuer reserves the right to reject or accept, in whole or in part, or to scale down, or ballot any application for the Preference Shares, without assigning any reason therefor, and no enquiry or
    correspondence on their decision will be entertained.

    It will depend on demand/supply.

    Reply
    VSLingam says 9 years ago

    I remember vaguely the last pref share issue for retail investors in 2001. There was no balloting. All valid applications were alloted albeit a smaller portion.

    Reply
fabledtale says 9 years ago

Will DBS still be obligated (when it is posting a profit) to pay the dividends after 2020 if it doesn’t call back the preferencial shares ?

Under what conditions is DBS obligated to pay the dividends of 4.7% ?

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    lioninvestor says 9 years ago

    Dear fabletale,

    There are certain conditions whereby the dividends are not payable. These conditions apply even before the ten years are up.

    One of them is if they do not pay their normal dividends to shareholders, then they can choose not to pay the preference shares dividends.

    You can refer to page 9 of the OIS.

    I have added a link to the OIS on top.

    Reply
coolp says 9 years ago

Anyone knows if this is first come first serve or by balloting?

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Ken says 9 years ago

can we use srs to buy ?

Reply
    lioninvestor says 9 years ago

    Hi Ken,

    You can’t use SRS.

    Reply
boonlaysg says 9 years ago

I had wanted to invest but decided against it after further analysis…

1. Such shares are good for the buyer when interest rates remain low as redeeming it in the secondary market would mean selling at above par. however when interest rates creep up, the issue might be priced below par in the secondary market (i.e. a hit on the buyer’s capital) in the event that the buyer needs cash for whatever reasons. dividends earn over time might be negated by the capital hit.

2. There is no gte that the bank will redeem it come call date. it really depends on the interest rate then. If interest rate is high come call date, it does not make sense for them to redeem as they will need to pay a higher rate for a new issue to redeem this old one. Thus buyers will hold onto the below par shares after the call date.

3. My opinion is that such shares are nothing more than a gamble against interest rate movements. And what goes down must surely go up some day…thus long term interest rate will most likely be up.

4. Why such instruments work for institutional investors is that they have a well diversified portfolio which allows them to raise cash from other sources if need be. so unless your investment horizon is as long as the big boys, such instruments might not work for you.

5. welcome all comments. cheers.

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CP says 9 years ago

Rate looks attractive. But what will happen to our investment after it expires in 2020? It says “……not redeemable at the option of the holder of the preference shares”?

Reply
    lioninvestor says 9 years ago

    Hi CP,

    The bank will have the option of redeeming them from you but not the obligation.

    If they choose not to redeem, you will have to sell on the secondary market.

    The shares have no definite maturity date.

    Reply
      VSL says 9 years ago

      Hi Lion,

      Pls clarify your statement:-
      “The preference shares are perpetual securities with no maturity date” ?

      The media mentions that it is a 10-yr Pref Share which means that it matures (ie expires) in 2020. By 2020, DBS must buy back the Pref Shares from investors, and return the principal in full. So why do you say that it has no maturity date? Pls explain? Thank you.

      Reply
        Eugene says 9 years ago

        From the prospectus:

        The Preference Shares are perpetual securities with no maturity date,
        and are not redeemable at the option of the Holders.
        Subject to the limitations and qualifications described in the Issuer Articles and summarized below under “Redemption: Limitations and Qualifications”, the Preference Shares may be redeemed for cash as described below, in whole and not in part:

        – at the option of the Issuer, on any date on or after the date falling
        10 years after the Issue Date (the “First Call Date”) (based on the
        expected Issue Date of November 22, 2010, November 22, 2020)
        at the Redemption Price (as defined below);

        As I understand, DBS has the option to redeem the shares in 2020 but is not obliged to do so.

        Reply
        lioninvestor says 9 years ago

        Dear VSL,

        Preference shares are unlike bonds. They don’t really have a fixed maturity date.

        The 10 year is to protect you from DBS redeeming them from you before 10 years. After 10 years, they have the option but not the obligation to redeem them from you anytime they want.

        Reply
          VSL says 9 years ago

          Dear Lion,

          Tks for explanations.

          Does this mean that DBS can’t (and won’t) redeem this new pref shares early ie before the 10 yrs is up?

          What if down the road the market interest rates drop even further (to 0% or negative %). In this case why would DBS want to continue to pay new pref shareholders 4.7% dividend when outside money is virtually free? I ask this because one of the reasons why DBS is redeeming their earlier pref shares (the one that has been paying 6% dividend) is because market interest rates have been going south this past decade. Tks.

          Reply
            lioninvestor says 9 years ago

            Dear VSL,

            The 10 years is for your protection. After that, no more.
            Precisely why DBS has come out with this new issue to redeem the old one.

            Reply
            Oldtypewriter says 9 years ago

            Hey VSL and lioninvestor,

            If I’m not wrong, as interest rates go down, the value of the preference share increases (same as bonds) but I’m not entirely sure if this altogether affects the redemption price or if the price sticks to $100? Any thoughts?

            If I’m right, even if interest rates go down, the redemption price for DBS to recall these shares would be high, serving as a deterrence for an early redemption.

            Reply
              lioninvestor says 9 years ago

              Redemption by DBS will be at face value. Therefore, if interest rates go down, they would be better off redeeming to issue new bonds/preference shares.

              Reply
michael says 9 years ago

Hi grace,

nope, we can’t use CPF

Reply
grace says 9 years ago

Hi all,

Anyone know if we can use CPF to buy this preference shares ?

Reply
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