One of Malaysia's leading merchant banks, CIMB (Moodys Baa3 Stable, Fitch BBB Stable), yesterday priced its inaugural tier 2 bond. At $100 million the deal was on the small side and leads Morgan Stanley and CIMB did well to counter the liquidity premium that such small deal usually demands.
The 10 year, non-call five deal was priced at 220bp over five year Treasuries, equating to a spread of 181bp over Libor. Initial market talk when the deal was launched on Friday suggested that it would have to pay around 205bp over Libor and so it came in 24bp tighter than expectations. It was structured as a Reg S, Eurobond and fees totalled 60bp.
The deal was helped by a strong wind that flowed thought the Malaysian banking sector over the past week. Eon Bank's similar issue had moved in over the past week from 167bp over Libor to 162bp over, while RHB's four-year deal had tightened 7bp to 164bp over. CIMB's parent Bumiputera Commerce Bank (BCB) had come in 4bp to 138bp over Libor.
Interestingly the spread differential between BCB, a commercial bank and CIMB, its merchant-banking subsidiary on this deal is 39bp, which is within the general range of 30bp-40bp wider that similarly rated investment banks usually trade than commercial banks.
However in CIMB's case, Malaysian merchant banks are slightly different from their international cousins as they are heavily regulated and are allowed to take deposits, both factors being credit positive.
Nevertheless, as a first time borrower, bankers believe that CIMB had to offer a slight premium, in order to ensure a successful take up, even though it was only $100 million.
Syndicate bankers report that the order book came in at $550 million, although given the extra put in to compensate for a small transaction, the real demand was said to be about $350 million. Of this, 20% of the demand came from Europe with 80% coming from Asia. The final splits were said to match the order book with a slight bias towards Asian accounts.
Perhaps most interesting about the transaction is what CIMB plans to do with the proceeds. Before the deal, the bank ran a tier 1 capital ratio in the low 30% area. The proceeds from this tier 2 issue will be used to buy back equity reducing the tier 1 ratio down to slightly over 20%. Investors never really like to see debt used to buy back equity, but in this case, the inefficiency of the balance sheet almost demanded it.
Bankers close to the deal defended the move saying it was the right thing to do. "A bank that is thinking about capital efficiency is also thinking about operational efficiency," says one. "Even though investors never like to see debt used to buy back equity, I think this is credit positive."
One analyst described the situation as fluid, given that CIMB has been very active in the market looking for new businesses and acquisitions. "This is a dynamic situation given the prospects for growth and change in CIMB's businesses and further capital restructuring exercises could take place," says Bernard Peh, a credit analyst at Barclays Capital in Hong Kong. Peh points to a recent attempt to buy local broker TA Capital which fell through last week as evidence that CIMB is going to be expanding its business through acquisitions. CIMB also announced last month that it would be setting up an investment banking subsidiary in Indonesia with its parents bank, to be called CIMB Niaga.
