Indonesia’s Bank Danamon is seeking to raise up to Rp5 trillion ($586 million) from its upcoming rights issue, according to indicative terms announced yesterday. Danamon is controlled by Temasek Holdings and, according to its website, ranks as the sixth-biggest bank in Indonesia by asset size.
While the final price won’t be fixed until August 15, it will come at a discount ranging from 15.8% to 28.1% versus last Friday’s closing price of Rp5,700 and at a discount of 14.3% to 25.4% versus the theoretical ex-rights price (Terp), the bank said.
This is wider than the discount offered on the rights issue by larger rival Bank Mandiri earlier this year. Mandiri priced the rights issue at a 9.7% discount to Terp and the placement of the government’s 66.7% entitlement at an even tighter discount of 6.25%, resulting in a combined deal size of Rp11.85 trillion ($1.3 billion).
However, Mandiri and its underwriters gave themselves more flexibility by setting a wider discount range to begin with — 3.1% to 37% versus the last close before the announcement — which was helpful as the share price fell in the period between the announcement and the pricing.
Danamon is committed to price its offering in a range between Rp4,100 and Rp4,800, irrespective of how much the share price falls before the deal closes. However, since the issue is fully underwritten, it will be the underwriting banks that will take the hit if the discount turns out to be too tight for the existing shareholders. The share price fell 3.5% yesterday to a close of Rp5,500.
Citi and Deutsche Bank are joint underwriters for about 32.6% of the offering, meaning they are each taking on about $95 million of risk. The banks are expected to offload some of this by entering into sub-underwriting agreements with other parties. The remaining portion will be bought by Temasek, which has committed to take up its 67.37% entitlement in full.
Danamon is offering 144 new shares for every 1,000 existing shares, which will see it issue approximately 1.2 billion new shares, or 14.4% of the existing share capital.
Temasek’s support in combination with a strong economy — Singapore grew by 6.5% in the first quarter — and the fact that Indonesia is the best-performing stockmarket in Asia for the second year running, should make a discounted sale attractive to investors. For one, they will be able to buy the shares at between 1.7 and 1.9 times book value, compared with a valuation of 2.6 times book at the end of trading last Friday. Also, there haven’t been many Indonesian deals of size this year for investors who want to get exposure to the market. Aside from Mandiri’s rights issue, the largest transaction so far is Garuda Indonesia’s $520 million initial public offering in January, which was largely shunned by international investors who worried about the reputation of the recently restructured airline and also thought the price was too high.
Danamon is already one of the best capitalised banks in the region with a tier-1 capital ratio of 13.6%. This will improve to 17.9% after the rights issue. The proceeds will also be used to fund further loan growth and to pursue both organic and inorganic business opportunities, according to a term sheet.
In the first half of this year, Danamon recorded loan growth of 31% from a year earlier to Rp92.8 trillion, while deposits grew by 23% to Rp84 trillion. Net profit improved by 3% to Rp1.47 trillion and notably, its fee income rose by 12% to Rp1.8 trillion driven by banc assurance and credit-related fees.
To help build support for the deal, the management will go on a roadshow that will start on Friday and last until August 11. The rights price will be determined on August 15 and existing shareholders will then need to approve the capital-raising at an extraordinary general meeting on August 24.
Assuming they do give their okay, existing shareholders will be able to either subscribe to exercise their rights or trade them in the market from September 15 to 21. The record date for the rights issue is September 12.
Danareksa Sekuritas is involved in the deal as a domestic agent, but will not take on any underwriting risk.