CIMB raises $1.09 billion from upsized placement

The tightly priced deal receives strong support from the Malaysian bank’s existing shareholders despite requiring investors to shoulder quite a lot of market risk.

Malaysia’s CIMB Group has raised M$3.55 billion ($1.09 billion) from a follow-on share sale that was upsized in full and priced at a very tight discount. The deal is the bank’s first fundraising through the equity capital markets since it listed in 2003 and the largest equity deal in Asia ex-Japan so far this year.

The key reason for the transaction, according to a CIMB announcement, is to strengthen the bank’s capital position and to ensure that it has enough funds to continue to grow. One term sheet noted that some of the proceeds will be injected into the bank’s operating subsidiaries to support further growth, while some will be used to reduce borrowings and fund its working capital.

The Reg S deal launched at 8:30am Hong Kong time on Monday after the stock was suspended from trading but the three bookrunners had done quite a bit of work before that, including a wall-cross of a limited number of investors on Sunday night. As a result, they were able to go out with a message at launch that the base deal was already about 85% covered, giving other investors confidence to come into the transaction despite a very aggressive discount.

CIMB offered 400 million new shares at a price between M$7.10 and M$7.25 plus an upsize option of another 100 million shares in case of strong demand. At the full size, the deal accounted for 6.5% of the existing share capital and close to 70 days of trading, based on the average daily volume in the past three months.

The price range translated into a discount of just 0.7% to 2.7% versus Friday’s closing price of M$7.30.

Given the large deal size, that did look quite ambitious and if you take into account – as many investors did – the fact that CIMB’s share price jumped from M$7.24 to M$7.30 in the final 20 minutes of trading on Friday after hovering around the M$7.24 mark during most of the session, the discount was even tighter.

Hence, it was no great surprise that the deal ended up pricing at the bottom of the range for the maximum discount of 2.7% to the latest close, or 2.2% when compared to Friday’s volume-weighted average price (vwap).

Significantly more notable was the fact that CIMB was able to exercise the upsize option in full, allowing the transaction to be increased by 25% to just over $1 billion. Sure, the base deal was 85% covered at launch but the issuer still needed quite a lot of additional demand in order to exercise the upsize option in full.

Malaysia is also closed for trading on Tuesday to observe the prophet Mohammed’s birthday and the shares sold through the placement will not actually list until January 23, meaning investors participating in the deal are essentially taking on 10 days of market risk – at a discount of just 2.7%.

One source said CIMB was able to get away with this partly because investors viewed the capital-raising as a positive catalyst for the bank and because it is a low-volatility stock. Its share price has also fallen 4.2% since the beginning of this year, underperforming both Maybank and the main Malaysian index, and the placement price is only just above the most recent low-point of M$7.11 that the stock reached in late August before started to rebound. That should allow for a bit of upside once the share sale is completed.

But perhaps most importantly, the deal saw strong support from existing shareholders. One source said they accounted for more than three-quarters of the total demand.

The demand was particularly strong from domestic accounts but there was also good interest from international investors in the rest of Asia and Europe, sources said, noting that all types of investors were represented in the final order book, including sector funds, regional funds, global long-only funds, insurance companies, offshore private banks and even hedge funds – although the narrow discount would have been pretty unappealing to them.

The deal wasn’t open to onshore US accounts, but there were a few orders from offshore US investors, the sources said.

Overall, the upsized deal was said to be well covered when it closed at 5:30pm with orders from just under 70 investors. The allocation was pretty tight with the top-10 accounts taking about 75% of the deal.

In its announcement, CIMB noted that the deal will increase its common equity tier-1 capital ratio to 9.7% from 8.2%, bringing it on par with the Malaysian bank average of 9.8%.

Nazir Razak, group CEO,  said that, while CIMB has always sought to operate at optimal capital levels, the sharp depreciation in the Indonesian rupiah in 2013 resulted in a setback for its capital accumulation plan. CIMB owns 97.9% of Bank CIMB Niaga, which is Indonesia’s fourth largest bank by assets, and the group’s business in Indonesia accounted for about 30% of its earnings in the first nine months of last year, according to an earlier announcement.

“With the new capital we stand strong to face any future volatility in financial markets and can continue to grow our business at our desired pace going forwards,” Nazir said Monday.

The fact that the deal comes on the back of five consecutive days of declines in the share price and just a month before the bank is due to release its 2013 earnings, shows that it was indeed keen to replenish its equity capital. However, according to one source, M$7.10 was the lowest price that the CIMB management was prepared to accept after taking into account the potential return-on-equity and the dilution for existing shareholders.

The bank, which has been expanding aggressively in the past few years both in Southeast Asia and the rest of the region, reported a 7.3% year-on-year increase in net profit for the nine months to September 2013 to M$3.5 billion. Its annualised net return on average equity was 16.0%, which was in in-line with its full year target.

CIMB has issued new equity in the past few years to individual investors on a bilateral basis, partly to pay for acquisitions, but it hasn’t tapped the broader equity capital markets for funds since it went public more than 10 years ago.

The placement is the largest Malaysian ECM transaction since Ananda Krishnan-backed pay-TV operator Astro Malaysia raised $1.5 billion from an IPO in October 2012. It is also the largest sale of new shares in Asia ex-Japan this year. The only other follow-on so far is the $759 million sale of new H-shares by Hong Kong-listed China Oilfield Services (COSL) last week, although that transaction was done as a private placement to just 10 investors.

Bank of America Merrill Lynch, CIMB Investment Bank and Credit Suisse were joint bookrunners for deal.

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