OCBC has launched the Preference Shares placement again, with overwhelming response in June issue. The dividend rate is fixed at the same 5.1% per year for 1st 10 yrs and subsequently floating rate thereafter.

The Offering will be made by way of a Placement and an ATM Offer, which will open from 9.00 a.m. on 12 August and close at 12.00 noon on 26 August 20081. Of the total of 10 million Preference Shares available for subscription, 2.5 million Preference Shares (or S$250 million) will be offered under the ATM Offer, which is open to the general investing public.

Under the ATM offer, the minimum subscription is 100 Preference Shares (or S$10,000), and thereafter in multiples of 100 Preference Shares (or S$10,000). Retail investors can apply at any OCBC Bank ATM and ATMs of the other participating banks, namely DBS Bank (including POSB) and UOB Group. ATM applications will be subject to balloting if the total subscriptions exceed the amount available for subscription. The last public offer was about 11x oversubscribed.

The Preference shares is NOT risk free. You may want to take note of the following:

1. Preference shares are traded like any normal shares
2. They pay a fixed dividend
3. It has an infinite life. OCBC is NOT obliged to redeem it but they have a call provision attached, so it may not remain outstanding forever.
4. IMPORTANT: The issuer (OCBC) can FORGO paying the dividend if their earnings is insufficient. Failure to pay the dividends does NOT result in default of obligation. However, preferred shareholders rank in priority to the common shareholders when paying of dividends.
5. Preferred sharesholders DO NOT have voting rights (except in financial distress). Thus, they CANNOT go to the AGM to “pack” the buffet.
6. Preference shares are generally classified less risky than stocks, but more risky than bonds. This Preference Shares have been rated investment grade by rating agencies, with an Aa3 rating from Moody’s, A+ from Fitch and A- from Standard and Poor’s.

Generally speaking, our local banks are very conservative and well run. Therefore, barring unforeseen circumstances, I don’t foresee any default of dividend in the foreseeable future. Of course, higher returns always come with higher risks, investors should not compare preference shares with fixed deposit.

After all, with inflation expected at about 5~6%, even this dividend yield is probably not enough to prevent your savings from shrinking.

OCBC Bank is offering S$1 billion worth of preference shares that will pay a fixed annual dividend of 5.1 percent.

The move is a bid by the lender to strengthen its Tier 1 capital base.

The bank says up to 9.5 million shares at S$100 each will be allocated to institutional and retail investors.

Another 500,000 shares, also at $100 each, will be sold to retail investors through the automated teller machine network of OCBC and DBS.

The dividend is paid twice a year in June and December.

The minimum subscription is 200 preference shares or S$20,000, and thereafter in multiples of 100 preference shares or S$10,000.

OCBC says the preference shares are perpetual securities with no fixed redemption date.

They can be redeemed at the option of the lender five years from the date of issue and on each dividend date thereafter, subject to approval from the Monetary Authority of Singapore.

According to OCBC, the net proceeds from the issue will be used for general corporate funding purposes.

The preferences shares have been rated Aa3 by ratings agency Moody’s. Fitch has given an A+plus rating, while Standard and Poor’s has assigned an A-minus.

The offer closes on July 28 and the preference shares are expected to be listed on the Singapore Exchange from July 30.

Two weeks ago, DBS Bank raised S$1.5 billion from the sale of preference shares. However, that offer was made only to institutional investors.