Singapore’s first covered bond, sold last week by DBS, has highlighted the availability of a new low cost funding option for banks from the country, Moody’s said today (Friday), opening the door for UOB and OCBC to follow with covered bond debuts of their own.

DBS attracted $1.37bn of orders for the debut $1bn (Eu905m, SGD1.36bn) three year 144A issue, which was priced at 37bp over mid-swaps on Wednesday of last week (29 July). The covered bond was rated Aaa by Moody’s, while it rates DBS Aa1.

The rating agency said the deal’s lower spread versus Aa1 rated senior unsecured bonds demonstrates that covered bonds can be an additional source of cost-effective funding for DBS, which it said was a credit positive for the issuer.

“While the cost savings – relative to senior unsecured debt – will vary, depending on market conditions, DBS will be able to more readily return to the covered bond market for funds now that it has issued its first deal,” said Simon Chen, Moody’s vice president and senior analyst.

“Covered bonds provide a funding channel that has remained available for banks in other countries during periods of market instability, and give the issuer access to a larger pool of investors consisting of central banks and supranationals.”

Speaking after the deal had been completed, Colin Chen, managing director and head, structured debt solutions, at DBS, highlighted the diversification of funding achieved by the inaugural issue, and cited as a particular positive that the issuer had been able to reach new accounts in a low cost manner.

Banks were allocated 62% of the deal, fund managers 19%, central banks 9%, supranationals 8%, corporates 1% and private banks 1%.

Moody’s said that it expects DBS’s Singaporean peers United Overseas Bank (UOB) and Oversea-Chinese Banking Corp (OCBC) could also launch covered bonds to diversify their funding sources.

However, it added that the issuance size of Singapore covered bonds will remain limited for the foreseeable future because of the availability of low cost unsecured funding for the highly-rated banks.

Joe Wong, Moody’s assistant vice president and analyst, said the lower spread achieved by DBS’s deal reflects its structural protections for bondholders, which would allow them to recover a higher proportion of their investment compared with senior unsecured bondholders in the event of an issuer default.

“The DBS covered bonds use a structure that is similar to that for covered bonds issued in other countries and which segregates the cover pool assets for the protection of covered bond investors,” he said. “The structure provides for the establishment of a special purpose vehicle to hold the cover pool assets and guarantee the covered bonds.”

Moody’s noted that an additional feature in DBS’s issue is the use of a trust structure, which it said allows the cover pool to include mortgages where borrowers are using their savings under the Central Provident Fund (CPF) to fund down-payments and service their loans. The CPF is a social security savings scheme jointly supported by employees, employers and the government.

The DBS covered bonds also feature a maturity extension and cross-currency swap to mitigate refinancing risk and currency risk, Moody’s added.