Bank Danamon sets rights issue price at Rp4,300 per share

The Indonesian bank offers its rights shares at a 19.7% discount to Terp and a 14% discount to yesterday's close as it seeks to raise $585 million.
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Danamon is Indonesia's sixth-largest bank by assets
<div style="text-align: left;"> Danamon is Indonesia's sixth-largest bank by assets </div>

Indonesia’s Bank Danamon has fixed the price for its upcoming rights issue at Rp4,300 per share, which is in the bottom half of the initial range and will result in a total deal size of Rp5 trillion ($585 million). The money will be used to fund further loan growth and to allow the bank to pursue various business opportunities, including acquisitions.

The share price has held up relatively well since the indicative terms were announced on July 25 despite the collapse in global equity markets in recent weeks, and the discount versus Friday’s close (the price was announced yesterday morning) is 17.3%. There was a risk that the discount could end up being too tight since the price had to be set within an absolute range of Rp4,100 and Rp4,800, but with the share price falling only 8.8% since the indicative terms were announced and the rights price fixed towards the bottom of the range, the current discount looks reasonable. The Jakarta Composite Index fell 6.5% in the same period, but other markets fared a lot worse: Singapore dropped 14.1%, Hong Kong was down 13.6% and the Dow Jones index lost 14.7%.

However, the subscription period doesn’t end until September 21 so the risk is still there. Minority shareholders will vote on the deal at an extraordinary shareholders meeting tomorrow and if it is approved, Danamon’s shares will start to trade ex-rights on September 8. The subscription period and the trading of the rights in the market will both open on September 14.

As an indication of what could potentially happen if the broader equity market stays under pressure, Danamon’s share price fell 3.9% yesterday to Rp5,000, resulting in a narrowing of the discount versus the latest close to 14%. The narrower the discount, the less attractive the offering will be, especially for potential new investors.

Of the investors targeted during the roadshow, about 30% were new investors who didn’t already own shares in the bank. They can access the rights issue either by buying Danamon’s shares in the market before the record date, or by buying nil-paid rights in the market from existing shareholders who don’t want to participate themselves.

While announced to the market yesterday morning, the price was actually filed with the Indonesian regulators on August 16 and hence the theoretical ex-rights price (Terp) is calculated based on Danamon’s closing price of Rp5,500 on August 15. Based on this, the discount to Terp works out at 19.7%.

The indicated range implied a discount to Terp (based on the July 22 close) of 14.3% to 25.4%.

The relative support for the stock while the management has been on the road suggests that the initial response to the rights issue is quite good. A key reason for the interest is no doubt the strong support from Temasek Holdings, which is Danamon’s largest shareholder and has committed to take up its 67.37% entitlement in full.

But Danamon is also viewed as a decent quality lender that is in a good position to benefit from the growth in the Indonesian economy. According to its own website, it ranks as the sixth largest bank in Indonesia in terms of asset size and it has a market capitalisation of about $5.6 billion. It is also one of the best capitalised banks in the region with a tier-1 capital ratio of 13.6%. This will improve further to 17.9% after the rights issue.

The belief in the lender is evident by the fact that aside from Temasek, Danamon has a high-quality institutional shareholder base that includes top international names like Franklin Templeton, Fidelity, Blackrock, Schroder Investment and JF Asset Management.

Whether they will all take up their share of the rights issue remains to be seen, but in a global context Indonesia isn’t a bad place to be right now. The stockmarket is still up 3.7% year-to-date, which makes it the best performing stockmarket in Asia — and among all the global markets tracked by Bloomberg as well. In Asia, only Indonesia, Thailand and the Philippines are still up on the year.

The fact that the money raised will be used to support future growth is another selling point for the rights issue, and may explain why Danamon’s share price has held up so well since the deal was first announced. In the first half this year, Danamon recorded loan growth of 31% from a year earlier to Rp92.8 trillion, while deposits grew by 23% to Rp84 trillion.

Another Temasek-backed rights issue that is currently in the market — Singapore-listed CitySpring Infrastructure Trust — has been less fortunate, with the share price continuing to fall. Yesterday the trust fell below the rights issue price of S$0.39 at one point but ended up closing right at the offer price. However, that means the rights issue isn’t offering any discount versus the market price, making the deal significantly less attractive to investors.

The subscription for the S$210.2 million ($174 million) deal opened last Thursday and will close on September 2.

CitySpring, which owns three cashflow-generating assets in Singapore and Australia that are involved in gas distribution, water desalination and electricity transmission, is a significantly smaller company than Danamon — it has a market cap of about $350 million — and is primarily owned by retail investors. It will use the proceeds from the rights issue mainly to pre-pay or refinance outstanding debt to ensure that the credit ratings on a dual-tranche bond issued by one of its units don’t fall below investment grade.

Temasek owns 27.8% of CitySpring and has committed to buy up to 85% of the 11-for-20 rights issue in case of a lack of demand from other investors. The remaining 15% is underwritten by DBS, Goldman Sachs and Morgan Stanley.

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.

The 32.6% of the rights offering that is not being taken up by Temasek will be underwritten by Citi and Deutsche Bank, meaning they are each taking on about $95 million of risk. An undisclosed portion of this has been sub-underwritten to other parties. One source said there was more than enough demand to sub-underwrite the entire 32.6%.

Danareksa Sekuritas is involved in the deal as a domestic agent, but will not take on any underwriting risks.

¬ Haymarket Media Limited. All rights reserved.
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