Bumiputra-Commerce mandates dollar sub debt

Malaysia''s second largest banking group lays plans for a $200 million lower tier 2 issue.

Morgan Stanley has won the ratings advisory mandate for Bumiputra-Commerce Bank (BCB) and is also expected to win books for the bank's forthcoming 10 non-call five sub debt issue alongside Commerce International Merchant Bank (CIMB), the investment banking arm of BCB's parent Commerce Asset Holdings.

The US investment bank beat off competition from HSBC, JPMorgan and Salomon Smith Barney to win the deal, which may hit the market in late October given the aggressive timetable BCB is said to have set itself. As such it may emerge before a competing $200 million 10 non-call five deal from RHB Bank led by ABN AMRO.

Many houses now believe that Moody's is about to upgrade Malaysia from Baa2 to Baa1, standing both deals in good stead from a positive knock on effect on Malaysian spreads. But for BCB, the key issue is whether it can obtain a full set of investment grade ratings similar to its main domestic competitor Maybank, which also provides the best pricing comparable.

Analysts say that Moody's is most likely to comply since it sets greater store on sovereign ownership and BCB is 31.57% owned by a combination of the Ministry of Finance and Khazanah. Standard & Poor's, on the other hand, has previously assigned a much lower BBpi rating and took a long time to upgrade the much larger Maybank to full investment grade status.

Maybank currently has a Baa3/BBB- subordinated debt rating and its recent $380 million 6.125% 10 non call five issue was being quoted earlier this week around the 220bp mark over Treasuries. This marks a widening since launch in late May at 173bp over five-year Treasuries.

However, while the deal has not provided the same outperformance as some Malaysian credits, it has not widened at all relative to its main pricing benchmarks, Tenaga and Bank of East Asia (48bp and 8bp premium respectively at launch). And while BCB may in turn suffer from the Treasury spread it will need to pay to clear a deal, the all-in cost should be lower as US Treasury yields have fallen considerably since Maybank came to market.

If BCB can obtain two investment grade ratings, bankers believe that it should be able to price about 10bp back of Maybank.

At the end of the first half, BCB reported an overall CAR of 11.11% of which tier 1 equity accounted for 8.36%. Specialists say that the bank has been keen to tap the subordinated debt market because it wants to build a capital cushion to prepare itself for the next round of consolidation in the Malaysian banking sector and possible overseas acquisitions following its recent bid for Indonesia's Bank Niaga.

BCB was formed in 1999 from a merger of the scandal plagued Bank Bumiputra, which had been bailed out by the government three times and Bank of Commerce, whose management took over the combined entity. The complexities of merging the two banks meant that BCB was absent from the next round of consolidation, which swept through the sector, but is now well positioned for future consolidation.

Analysts also say that a tier 2 deal makes sense since increased provisioning has slightly eaten into the bank's ability to generate internal capital. At the end of June, for example, BCB reported operating profit of $31.07 million compared to $32.6 million at the end of the first quarter. The first half was also $13.2 million down on 2001, when the bank reported an operating profit of $77 million.

In both instances, the bank said that the decreases could be attributed to higher provisions as NPL reductions tend to lag economic recovery. As of June, BCB reported net NPLs of 7.3%, up from 6.7% at the end of the previous financial year.