FRUSTRATED retail investors who were locked out of DBS Bank's $1.5 billion preference share sale last month have been promised a better deal from OCBC Bank.
The smaller bank announced yesterday that it would sell up to $1 billion of preference shares, and by last night, institutions had already placed orders for more than $1 billion worth.
But OCBC vowed that retail investors would get a fair chance to buy the shares despite the red-hot demand, even if institutional orders have to be cut back.
HIGHER RATES, BUT THERE ARE RISKS
What are preference shares?
PREFERENCE shares, so called because they rank above ordinary stock, typically offer investors relatively high fixed dividend rates. They can be traded on the market.
They have no fixed redemption date but can be redeemed, or cashed in, only after a certain period.
But this is at the option of the bank, not the shareholder, and only at the offer price.
These investments are not risk-free as they rank below bank deposits, interbank borrowings and other senior debts in terms of priority of payment.
So if a bank crashes, preference shareholders are among the last to get paid.
That is why such shares pay dividend rates much higher than the rates on fixed deposits, which are relatively risk-free.
'Our issue is targeted mainly at retail individual investors. In this regard, we will have to scale back allocation to institutional investors, and their orders will not be allocated in full,' said OCBC's head of group investment banking, Mr George Lee.
He added that the offer remained open for retail investors, and OCBC would ensure a fair allocation.
OCBC's welcome for the retail investor contrasts sharply with DBS' deal. The latter's offering, with a hefty minimum size of $250,000, was meant only for institutional investors, and generated much flak from the man in the street.
A reader writing in to The Straits Times Forum page reckoned that DBS excluded small investors as it 'may be less cost-effective and more cumbersome'.
For fund raising, some observers said retail investors mattered little to large organisations.
Retail investors are typically attracted to preference shares because of their relatively high dividend rates.
OCBC's offer gives a slightly less attractive dividend of 5.1 per cent a year, compared with the 5.75 per cent a year in the first 10 years offered by DBS.
But OCBC's head of group consumer financial services, Mr Andrew Lee, said the dividend was still higher than current yields for 10-year Singapore Government bonds and Singapore dollar fixed deposit rates.
At $100 a share, the minimum investment is 200 shares or $20,000, followed by multiples of 100 shares or $10,000.
The minimum $20,000 investment would return $1,020 a year in dividends. The dividend is paid in two stages in June and December.
OCBC said the offering would be in two phases: a placement of up to 9.5 million shares until July 15, then an ATM offer of up to 500,000 shares from July 16 to 28.
Retail investors with trading accounts may apply for the placement, although the ATM offer will be simpler.
ATM applications will be balloted if necessary. The shares have been rated investment grade by agencies, with an Aa3 rating from Moody's, A+ from Fitch, and A- from Standard and Poor's.
OCBC said the shares are intended to qualify as Tier One capital, which all banks are required to hold as a buffer against the loans they issue. The preference shares are perpetual securities with no fixed redemption date.
They can be redeemed at the option of OCBC, but not shareholders, five years from the date of issue and on each dividend date after that. This is subject to approval from the Monetary Authority of Singapore.
Mr David Gerald, president of the Securities Investors Association of Singapore, applauded OCBC's move to include small investors.
He said retail investors play an important role in advancing the rights of all investors, so their efforts should not be underestimated.
Despite the popularity of preference shares, bankers warn that the investment is not risk-free. The shares rank below bank deposits and other debts in priority of payment.
This article was first published in The Straits Times on Jun 3, 2008
