Taiwan bank launches tender for subordinated bonds

Taiwan's Cathay United Bank has launched a tender to buy back up to $125 million of its $500 million 5.5% subordinated bonds due in 2020 at a discount versus par of up to 18%. Several Asian banks have been buying back outstanding debt in the open market over the past six months to take advantage of the depressed prices to reduce their leverage, improve their core capital ratios and book a bit of a profit in the process. However, this is the first Asian investment-grade company to set out to buy bonds in greater size through a tender, following the example of non-investment grade companies like Galaxy Entertainment and Nine Dragons Paper.

The timing of the tender is somewhat surprising as the bonds have been on a steady rise since they dropped to the low 70s in October last year, and before yesterday's announcement they were bid at about 82 cents on the dollar, giving a yield of about 8.8%. This means it will be more costly for the bank to buy back the bonds (compared with a few months ago) and the bondholders may also be less keen to cash in their holdings as their losses are shrinking. That said, sources note that this is Cathay United's only international debt and as part of a wider liability management exercise it may make sense to reduce its exposure while it still has the opportunity to do so.

The tender will be conducted through a so-called modified Dutch auction, whereby investors can submit their bonds for tender at a price between 82 and 92 cents on the dollar, plus accrued and unpaid interest. The final clearing price will be determined after the close of the tender on May 12 and will result in all bondholders receiving the same price for their bonds -- although investors who tender their bonds after the early tender deadline on April 29 will not receive the early tender premium of 3 cents which is included in the earlier mentioned price range. In an announcement issued yesterday, Cathay United said the final clearing price will be the single lowest price at which it can buy back bonds with a combined principal amount of $125 million. If the amount of bonds tendered exceeds the $125 million cap, the company will buy back bonds tendered at the final clearing price on a pro rata basis, while all bonds tendered at lower prices will be bought back in full.

The tier-2 bonds were issued in 2005 and are callable in October 2015. If not called, the coupon will step up from a fixed 5.5% to a floating rate of 180bp over six-month Libor. They are listed on the EuroMTF Market in Luxembourg and are rated A2 by Moody's Investors Service and A- by Standard & Poor's. J.P. Morgan is acting as the dealer manager for the offer.

Many of the bonds are expected to have drifted back into the region since issue and to be currently held by Asian investors. However, the tender is a 144A-registered transaction, meaning it is open to onshore US investors. One source says fewer than 100 investors are expected to hold bonds in sizes that make them interesting targets for the tender (at least $5 million to $10 million).

At first glance, the benefit to the company looks to be pretty small -- assuming it buys back the bonds at 92 cents to the dollar, it will save only $10 million on the entire $125 million compared with if it had bought them at par. However, one source notes that bond issuers will typically have swapped the fixed rate for floating and, assuming this is true for Cathay United as well, it may be able to save that same amount again by unwinding the swap.

The improvement in the bank's capital adequacy ratio and tier-1 ratio -- 11.03% and 8.59% respectively at the end of December -- will also be marginal. Cathay United is a wholly owned subsidiary of Cathay Financial Holding and the second largest bank in Taiwan in terms of assets. It also ranked as the country's second largest private commercial bank in terms of corporate lending at the end of last year, according to information provided by the bank itself.