Commerce Asset brings rare exchangeable

Strong demand revives Asian equity-linked market.

Malaysia's Commerce Asset Holding bought a rare Malaysian exchangeable to market on September 15, raising $125 million from a deal led by CIMB, JPMorgan and Morgan Stanley. The transaction represents the only outstanding equity-linked deal from the financial services sector in Malaysia and as such was snapped up by investors.

Despite the fact that orders started being capped at $10 million within 40 minutes of launch, the deal still went on to close five times covered.

Pricing of the five-year deal came at par with a zero coupon and redemption price of 107.758%. There is a three-year put at 104.585% to yield 1.5% and a 30-month call option with a 130% hurdle.

The exchange premium was fixed at a 30% premium to the stock's M$4.64 close. The issuer is Commerce Capital, a 100% owned SPV of Commerce Asset Holdings Berhad.

All terms came at the tight end of guidance and there is also a $15 million greenshoe.

Underlying assumptions comprise a bond floor of 91.5%, implied volatility of 33% and theoretical value of par. This is based on a credit spread of 125bp over Libor, 5% borrow cost, 1.1% dividend yield and 100-day volatility assumption of 32.5%.

Bankers say that while the deal's small size undoubtedly helped, it could still have been executed on the same terms at twice the size. "This deal wasn't driven by technicals but market access," says one observer. "Investors want to get exposure to the Malaysian banking sector and there are clear pricing points, which made the process very transparent."

Commerce Asset's two main banking subsidiaries - CIMB and BCB are both rated and the leads assumed a standard one notch holding company discount. CIMB, Malaysia's largest investment bank, is currently rated Baa3/BBB, while BCB, its second largest commercial bank, is rated Baa1/BBB.

BCB also has an outstanding eurobond, which has a call option in October 2008. The 5.125% deal has a one-year longer maturity than the exchangeable and is currently bid at 120bp over Treasuries, equating to about 99bp over Libor.

Specialists say there was not much credit stripping during the primary market and report the participation of about 80 accounts. Roughly 50% of the deal was placed in Europe, 35% in Asia and 15% with offshore US accounts.

Year-to-date, Commerce Asset's share price is up 13.17% and many houses have target prices around the M$6 level, which would value the stock at 1.6 times 2005 book and 15 times 2005 earnings. It is currently trading at about 1.2 times book and 11.5 times earnings, making it one of the cheapest listed Malaysian banking plays.

During the first half of 2004, net profit rose 8% year-on-year to M$413 million. This was largely driven by a decline in provisioning. CAR stood at 10.8%, marginally above the sector's 10.1% average.