Read the article ‘UOB sells covered bonds in dual currencies, a first in Asia’.
UOB sells covered bonds in dual currencies, a first in Asia UNITED Overseas Bank has sold its second covered bonds comprising two tranches - a US$500 million 2.125 per cent and a 500 million euro (S$745.8 million) 0.125 per cent.
The sale was Asia’s first dual currency covered bonds issue.
The covered bonds are issued under UOB’s US$8 billion covered bonds programme backed by a selected portfolio of mortgage loans linked to properties in Singapore, the bank said on Thursday. The USD/EUR covered bond offerings is part of UOB’s wholesale funding initiative, aimed to expand and diversify its investor base, said a bank spokeswoman.
The USD tranche matures in 2020 and received orders over US$900 million. By allocation, banks got 55 per cent of the issue, central banks and agencies 30 per cent, with funds and others the remaining 15 per cent. The geographic mix was Asia (41 per cent) and Europe (59 per cent).
The euro tranche which matures in 2022 had orders over one billion euros. The allocation was funds (44 per cent), banks (26 per cent), central banks/agencies (14 per cent) and pensions and others (16 per cent). European investors accounted for 93 per cent and Asia 7 per cent.
UOB’s first covered bond, a 500 million euro 0.25 per cent due 2021 issue was sold in February 2016
a. According to the above article, UNITED Overseas Bank has sold covered bonds denominated in US dollars and Euros in order to expand and diversify its investor base.
Suppose that some of the funds raised will be converted to US dollars to fund general corporate purposes. The UNITED Overseas Bank’s director would like to hedge this currency exposure and so he asks you, the financial manager of UNITED Overseas Bank, to analyse the possibility of using each of the following financial instruments to hedge the currency exposure:
i EUR/USD forward contracts
ii EUR/USD futures contracts listed on an organized exchange. Discuss and explain how UNITED Overseas Bank can make use of the above financial instruments to hedge the currency exposure.
b. Critically discuss which financial instruments in (a) you would like to recommend to UNITED Overseas Bank’s director in terms of contract size, delivery date, liquidity, initial cost and cash flows, respectively.
c. Discuss and explain which financial instruments in (a) you would like to recommend to UNITED Overseas Bank’s director if UNITED Overseas Bank wants to eliminate counterparty risk.