After writing my earlier post, DBS announced yesterday the public offer of up to S$500 million in aggregate liquidation Preference Share of 4.70% Non-Cumulative Non-Convertible Non-Voting Preference Shares Callable in 2020 subject to the Upsize Option (maximum issue of S$800 million).
The dividend payout is 4.70 per cent per year but this is not cumulative, meaning that should for some reason DBS does not declare any dividend for a particular period, this dividend will not be paid and is not accumulated for future payment.
The Preference Share is non-convertible, meaning that it will not be converted to ordinary shares at all. It remains callable in 10 years time at which time or after, DBS can redeem the Preference Share at current issue price which is S$100 per one Preference Share.
This Preference Shares will be traded on the Singapore Exchange at board lots of 100 shares. CPF money cannot be used for this issue. The minimum amount for 100 shares at S$100 is S$10,000.
The total amount of S$500 million, subject to upsize option, qualifies for Tier I regulatory capital of DBS Bank. The ratings agencies gave this preference shares an “A” rating by Fitch Ratings and Standard & Poor’s. Moody’s gave it “A3” rating.
As I mentioned in the earlier post, Preference Shares are ranked lower than the DBS depositors, creditors and bondholders but higher than ordinary shareholders with regard to recovery of money should DBS is liquidated. They may lose all or part of their investments in the Preference Shares. In this case, investors have to assess the business and operation risks of DBS in the future.
Even that the Preference Shares are traded on the Singapore Exchange, there is no guarantee that the market for this counter can be active or liquid.
Looking at the low interest rate environment, 4.7 per cent annual interest rate is attractive to investors. I foresee that this issue will be many times subscribed just like the S$1.7 billion preference shares of the same terms issued to institutional investors in October 2010. But one has to bear in mind that potential investors will be locked into 4.7 per cent interest over a period of ten years. The interest rate environment can change over the ten-year period. If future interest rate goes up significantly, the price of preference shares will decline during that time. Interest rate and fixed payout preference shares moved in opposite direction.
Copyright © 2010, limkimtong for Living Investment
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