Strong support for Bank Danamon's rights issue

Indonesia's Bank Danamon said yesterday that its Rp3.98 trillion ($362 million) rights issue drew total demand corresponding to more than 110% of the offer size. Excluding applications for excess shares, the deal was 99.9% subscribed, making it the most successful rights offering in Asia so far this year in terms of the take-up rate.

The deal was smaller than some of the other recent Asian rights offerings from the likes of DBS Group, Singapore developer CapitaLand, and the still-outstanding offers from Malaysian mobile operator TM International and Maybank, which all raised more than $1 billion. However, it was the largest rights issue by a financial issuer ever done in Indonesia, which, according to Tracy Woon, head of global banking for Citi Singapore, "reinforces the company's image as an industry pioneer".

The solid demand among existing shareholders and investors buying the rights in the market was underpinned by strong gains in the share price during the offer period, which meant that the relative attractiveness of the offering actually increased compared with when it was first announced. Early concerns about pricing risk due to the fact that there was a full two months from announcement to completion thus proved to be unfounded and sources earlier said that almost every investor who met the management during a roadshow in late February and early March chose to subscribe to the offering.

Typically, the share price will fall at least a little towards the rights price in response to the dilution in book value and earnings per share, but after Danamon's shareholders approved the offering on March 23, its share price actually started to edge higher. By the time subscriptions closed last Thursday, the stock had gained 30% from the Rp2,250 where it traded when the deal was announced on February 19 to Rp2,925 and the rights issue discount versus the market price had widened to 59% from 46.7% two months earlier.

The discount to the theoretical ex-rights price of Rp1,825 remained unchanged at 34%, however.

The strong take-up means that Citi and Morgan Stanley, which underwrote the portion of the deal that was not covered by Temasek's entitlement, will not have to buy any shares. Temasek owns 67.9%-of Danamon through a subsidiary called Asia Financial (Indonesia) and had committed to take up its proportional entitlement in full.

Danamon, which ranks as Indonesia's fifth largest commercial bank, offered 68 new shares for every 100 existing ones at a fixed price of Rp1,200 per share. It was already one of the most well-capitalised banks in Asia with a capital adequacy ratio of 15.4% and a tier-1 ratio of 13.8% at the end of last year, but the bank said earlier that it was keen to strengthen this further to enhance its lending capacity within its key focus areas of microfinance and small- and medium-sized enterprises. Following this issue, the tier-1 ratio will increase to about 21.2%, as of March 31, while the consolidated capital ratio will improve to 22.7%.

Commenting on the results, Danamon president director Sebastian Paredes said the bank believes that the positive response to the rights issue is a testament to the improving investment climate in Indonesia and reflects foreign investors' confidence in both the bank and the country. He noted that the bank has a strong liquidity position with a loan-to-deposit ratio of 81.4% as at the end of March and said this was further highlighted by the fact that Danamon had no problem repaying $300 million of subordinated debt that matured at the end of March.