BDO Unibank, the largest bank by assets in the Philippines, is again turning to its shareholders to raise funds, launching a Ps60 billion ($1.2 billion) rights offering.
The cash call will set a new record as the largest equity offering in Philippine history, overtaking the bank’s previous $1 billion rights issue in 2012 and easily dwarfing LT Group’s $915 million follow-on offering in 2013.
But in reality only $540 million of new shares will be available to the public, since the holders of the majority of shares have pledged to subscribe to their full entitlements. That group, which together owns 54.52% of the bank’s shares, includes controlling shareholder SM Investments. SM Investments will also fully underwrite any unsubscribed shares.
The terms of the deal show that BDO will issue a maximum of 716.4 million shares, equivalent to 19.63% of its share capital, on a 1-for-5.095 basis.
Each share will be sold for Ps83.75, representing a 23.4% discount to the stock’s 15-day volume weighted average price, and a 22% discount to the theoretical ex-rights price.
Banks rarely raise funds by selling equity since they can normally find cheaper funding from the interbank or debt capital markets. But the Philippines is different — banks' equity funding costs are low since they pay out little in dividends.
For instance, BDO paid a 1.34% dividend for the 2016 financial year, while most Asian banks offer a yield of 5% or more. The same is true of Metropolitan Bank & Trust, which raised $723 million from a rights issue in 2015 on a dividend yield of 1.35%.
In fact, the cost of BDO's planned rights issue is likely to be lower than that of its debt financing late last year, when it raised $300 million from a five-year bond at a coupon of 2.63%. The bank has not paid a dividend yield of more than 2% in any of the last three years.
BDO Unibank's timing also appears favourable as its stock has rebounded and is now approaching its highest level since May 2015. On Tuesday, the stock closed at Ps112 per share, just 9% below its all-time high of Ps123, set in April 2015.
The proceeds from the equity financing will provide BDO Unibank with “a comfortable buffer over higher capital requirements with the forthcoming imposition of the Domestic Systemically Important Bank (DSIB) surcharge”, the bank said in a statement.
Since the last right issue in 2012, the bank’s core equity tier one ratio has declined for five consecutive years from 15.3% to 11.1% last year, putting it just slightly above the statutory DSIB requirement of 11%. Systemically important banks must meet the requirement from the beginning of 2019.
BDO Unibank said the rights issue would boost its core equity tier one ratio to 14.7% on a pro-forma basis. That said, the equity fundraising is unlikely to impact its credit rating – BDO Unibank's rating already matches that of the Philippine government.
BDO Unibank’s rights offer will take place from January 16 to 24, and the rights shares will begin trading on January 31.