China Merchants Bank (CMB) has fixed the issue price of its upcoming $3.2 billion renounceable rights offering at a discount of as much as 46.1% to the theoretical ex-rights price for the H-share tranche and 42.7% for the A-share tranche. The deep discount is designed to help the country's fifth-largest lender by market value sail through its long-awaited deal successfully.
The subscription price -- HK$10.06 for the H-shares and Rmb8.85 for the A-shares -- was announced before the opening of trading yesterday, representing a 49.2% discount to the March 1 closing price of HK$19.80 in Hong Kong and a 45.7% discount to the closing price of Rmb16.30 in Shanghai on the same day.
A recent week-long rally (from February 23 to March 2) in CMB's shares, which saw the stock gain 7.6% in Hong Kong and 6.4% in Shanghai, is making the offering prices more attractive to shareholders.
"Investors are generally confident in the bank, and the good price will allow the bank to attract strong subscription interest from its existing shareholders," said She Minhua, a Shanghai-based banking analyst at Haitong Securities.
This is the first rights issue by a Chinese bank this year. It will be followed by Bank of Communications (BoCom) which said last week that it plans to raise Rmb42 billion ($6.14 billion) from a rights offering to holders of both its Hong Kong and Shanghai-listed shares. BoCom will offer stock holders the right to purchase 1.5 shares for every 10 shares owned, according to a filing with the Hong Kong stock exchange.
CMB is offering 1.3 new shares for every 10 shares owned. The markets responded positively to the announcement with the bank's Hong Kong-traded shares increasing 2.5% to HK$20.30 and the Shanghai-listed stock gaining nearly 1% to Rmb16.46 yesterday.
CMB first disclosed the offer in August, but later put it on hold. There was no public update about the deal until last week when the lender said shareholders had approved a rights offer at a 1.3 for 10 ratio. That came as a relief for investors who had been concerned about the scale of the deal.
The bank's Hong Kong- and Shanghai-listed shares have increased since last Tuesday -- the first trading day after that announcement was made.
"The uncertainties about CMB have been removed following the announcement of the size of the deal." said Tony Tong, a banking analyst at China Everbright Research.
CMB plans to sell a total of 2.48 billion new shares comprising 449 million H-shares and 2.03 billion A-shares. As of February 21, the bank had a total of 3.46 billion H-shares and 15.65 billion A-shares outstanding, the lender said in a filing to the Shanghai Stock Exchange.
The deal, which is fully underwritten by BNP Paribas, Bank of America Merrill Lynch, J.P. Morgan and UBS, will start its 11-day subscription period on March 15. The H-share holders will be able to trade the rights from March 17 to 24 and the new shares will begin trading on April 9, according to a term sheet.
The fundraising will significantly improve CMB's tier-1 capital ratio to about 9%, allowing it to catch up with an average core capital ratio of 9% to 10% for the country's leading lenders. However, CMB will still have capital pressures after the rights issue, banking analysts say.
China's listed banks will need to raise nearly $30 billion from the equity markets in 2010 to boost their capital adequacy ratios, economists estimate. After a massive Rmb9.6 trillion of bank lending last year, which led to excessive liquidity in the markets that encouraged speculative investments ranging from property to garlic, China's banking regulator has told commercial lenders to replenish capital to ensure healthy balance sheets. It has also told lenders to restrict new loans.
CMB is also in need of capital due to the cash-draining acquisition of a 53% stake in Wing Lung Bank in 2008, which was aimed at building its Hong Kong business.
On February 2, Fitch Ratings downgraded CMB's creditworthiness to 'D', which is the seventh grade in a nine-grade scale from 'A' to 'E', in response to the bank's "weakening credit risk".