OCBC redeems $1b batch of 5.1% preference shares

PHOTO: OCBC redeems $1b batch of 5.1% preference shares

The good times are about to end for holders of $1billion worth of OCBC preference shares paying 5.1 per cent a year in dividends.

The bank sold the shares to investors to raise funds in July 2008, when liquidity was drying up.

But now it is redeeming, or buying back, the shares.

Market watchers had been expecting the move, as OCBC raised the same sum, $1 billion, by selling another batch of preference shares in July last year.

And, with interest rates still very low, it was able to do so by offering 4 per cent dividends - cheaper funds for the bank compared to the 5.1 per cent instruments it is now redeeming.

Preference shares get a fixed dividend, but the holders do not have voting rights.

The preference shares will be recalled on July29 - the first date that OCBC is able to do so after issuing them in 2008.

Investors will get the par value of $100 per share, plus the final preferential dividend of 54 cents per preference share.

The last trading day on the Singapore Exchange will be July9.

"We are redeeming (the preference shares) now as part of our on-going capital management process," said OCBC Bank chief financial officer Darren Tan.

The preference shares were a hit when they were issued, especially for retail investors attracted by the dividend rate and frustrated at being locked out of an earlier $1.5 billion issue by DBS Bank targeted at institutional investors.

Each preference share had cost $100 and the minimum subscription was 200 shares or $20,000, and multiples of $10,000 after that. Both retail and institutional investors could apply.

Traders reported housewives and elegantly- dressed tai tais jostling to put in their subscriptions at OCBC's branches. It was more than three times over-subscribed.

Just two months after the issue, US investment bank Lehman Brothers collapsed, leading to a full-blown credit crunch.

The preference shares fell below par value at that time, as the crisis developed. In late 2009, they recovered to above $100 and have mostly traded above that since, with low interest rates leading investors to chase yield instruments.

But market watchers have for some time speculated that OCBC planned to recall the issue.

Last July's issue was for institutional investors, with a minimum subscription of $250,000. Market players said it gave OCBC the capital to potentially recall instruments paying out a higher yield.

"The market conditions had presented an attractive opportunity for us to rebalance the mix of our (capital and debt) instruments and improve the efficiency of capital structure, by issuing preference shares," said Mr Tan of last year's issue.

The spectre of an upcoming recall had driven down the price of the 5.1 per cent preference shares, especially this month when they dropped below $102.

Some investors have been caught out by the redemption and could suffer small losses, including a taxi driver, who wanted to be known only as Patrick. He bought the preference shares last month at $103.35.

He will receive one dividend - which will be paid later this month - of $2.54. He will also receive $100.54 next month - the final dividend plus the par value.

"I think I will lose a bit of money," he said. "I forgot to look at the next recallable date."

Some other preference shares are facing the risk of possible upcoming recalls.

OCBC has a 4.2 per cent issue it can recall on July14, or every dividend date after that. But it must make an announcement by Friday if it wants to recall it next month.

Asked about the possible recall, Mr Tan would only say that OCBC assesses its capital and financial requirements, as well as market conditions, before deciding on any early redemption of preference shares.

United Overseas Bank also has a 5.05 per cent preference share in the market; the next callable date is Sept15.

jonkwok@sph.com.sg


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