Bank Danamon outlines $335 million rights issue

The Indonesian bank, which is two-thirds owned by Temasek, offers new shares at a 55.6% discount to yesterday's close, although the deal won't open until early April.

Indonesia's Bank Danamon yesterday announced details of a Rp4 trillion ($335 million) rights issue that had been widely anticipated by the market, joining a series of Asian banks seeking to add fresh equity capital to their balance sheets.

Danamon, which ranks as Indonesia's fifth largest commercial bank in terms of assets, is 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%, but the bank said it is keen to strengthen this further to enhance its lending capacity within its key focus areas of microfinance and small- and medium-sized enterprises.

"In this financially turbulent time, it is prudent to be well capitalised," Bank Danamon's president director, Sebastian Paredes, noted in a written statement. "Our enhanced capital position and balance sheet will enable us to better meet any unforeseen developments. At the same time we will be able to take advantage of opportunities that may arise."

A deal from Bank Danamon had been expected for some time, and one reason for this is that the bank is 67.9%-owned by Singapore investment company Temasek through a subsidiary called Asia Financial (Indonesia). Temasek has been very active in recent months in terms of ensuring that the financial and real estate companies in its portfolio have adequate capital to face what is expected to be another challenging year head.

Since December, Standard Chartered Bank, DBS, CapitaLand and CapitaMall Trust -- which all count Temasek as a substantial shareholder -- have either completed or announced a rights issue. The close proximity of these deals suggests that Temasek is keen to come to market early while investors still have an appetite for new paper and ahead of an anticipated wave of companies needing to re-capitalise and to refinance maturing debt.

Like on the other deals, Temasek will take up its entitled portion in the rights issue, while the rest will be fully underwritten by Citi and Morgan Stanley. To limit the risk to their own balance sheet -- which is quite significant given the long lead time between the announcement and completion (59 days) -- the two investment banks yesterday invited other parties to come in and sub-underwrite the offering. The process was said to have attracted good interest, although there was no information on how much of the underwriting risk they eventually managed to pass on.

Danamon is offering 68 new shares for every 100 existing ones at a fixed price of Rp1,200 per share. The price represents a 46.7% discount to the Rp2,250 closing price on Tuesday -- the last full trading day before the company filed the prospectus with the regulators -- and a 34% discount to the theoretical ex-rights price of Rp1,825. However, leaks suggesting that the deal was imminent sent the share price 11% higher on Wednesday and by the time the offering was announced on Thursday morning the discount had widened to 52%. Another 8% gain yesterday pushed it out to 55.6%, thus increasing the attractiveness of the offer yet further.

However, much can still change as the offer won't actually open until April 7, assuming that Danamon's shareholders approve the capital raising exercise at an extraordinary general meeting on March 23. The latter is not really an issue though, since Temasek, which has already committed to participating in the rights issue, controls two-thirds of the vote.

The shares start to trade ex-rights on April 1 and the record date for establishing who will be eligible to participate has been set to April 3. Investors who choose not to exercise their rights can sell them on the Jakarta stock exchange between April 7 and 14. The acceptance period closes April 16.

To ensure strong participation, Danamon's management will conduct a roadshow to update investors on the impact of the fundraising exercise and its future plans. Having kicked off in Jakarta yesterday, it will meet investors in Hong Kong and Singapore next week and move on to Europe in the first week of March.

In the press release outlining the details of the issue, Danamon said the proceeds from the rights issue will boost its capital adequacy ratio as of December 31, 2008, to 20.8% and its tier-1 ratio to 19.2%.

Danamon made no direct reference to it in the rights issue announcement, but the bank does have an outlay of $300 million coming up at the end of next month in the form of a subordinated bond that it intends to call - suggesting the proceeds from the rights issue may also be intended to replace that cash outlay. Following a negative reaction in the market to an announcement by Korea's Woori Bank not to call a similar bond, Danamon said in connection with an earnings announcement on February 12 that it will be calling the 7.65% subordinated bond, which was issued in 2004.

Danamon posted a net profit after tax of Rp1.5 trillion ($127 million) for 2008, down 29% from Rp2.1 trillion in 2007. Excluding one-off non-recurring credit-losses and provisions for foreign exchange forward contracts, last year's profit amounted to Rp2.3 trillion, or 9.5% above the previous year when there were no one-off items. Total loans grew by 25% to Rp66.9 trillion, supported by all customer segments, but especially the "mass market" segment, including microfinance, personal loans and auto loans, which achieved 33% loan growth.

The non-performing loan ratio edged up to 2.3% from 2.2% at the end of 2007 and the bank noted that the sudden depreciation of the rupiah in the fourth quarter together with a decline in commodity prices had a negative impact on the cash flow of several exporters and thus their ability to continue to service their foreign exchange forwards contracts with Danamon - hence the provisions.

President director Paredes noted at the time that the company has formulated "key strategies" in light of the changing operating environment and have initiated actions to mitigate the risks.

"To anticipate continuing tight funding in 2009, we will focus on liquidity management and continue ongoing initiatives to enhance Danamon's funding franchise," he said and continued: "We will capitalise on our ability to cross-sell to customers across our lines of businesses. We will also enhance our operations through a series of business consolidations and regional alignments. Last but not least we will enhance our cost of credit management to ensure we maintain healthy growth across all of our businesses." 

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