PT Bank Danamon completed a maiden subordinated debt issue yesterday (Wednesday), pricing its Reg S deal inside of guidance and credit comps. At $300 million, the issue size was large for the Indonesian market and effectively doubles the $425 million outstanding subordinated debt universe of deals by BNI, Bank Mandiri and Bank Rakyat Indonesia.
The 10 non-call five transaction was led by Citigroup and Deutsche Bank on fees of 50bp. Both banks have strong links to Danamon, which was taken over by the Asia Financial consortium in May last year.
Deutsche Bank owns a 15% stake of Asia Financial, which in turn owns 61.9% of the bank. The remaining 85% is held by Singapore's government investment arm, Temasek Holdings.
A number of Danamon's senior managers are also ex Citibankers including President Director Francis Rozario, who previously ran Citi's global SME business and is currently trying to strengthen Danamon's hold in this sector.
Pricing of the deal was fixed at 99.592% on a coupon of 7.65% and yield of 7.75% giving a spread of 508bp over Treasuries. The main comparables are outstanding subordinated deals by Mandiri and more recently BRI.
All three have the same B3/B- issuer ratings. At the time of pricing, Mandiri's August 2012 issue callable in 2007 was trading at 108.875% to yield 7.57%. The curve alone is worth about 30bp to 35bp, meaning Danamon has priced about 12bp to 17bp through its larger state-owned competitor.
BRI's September 2013 bond callable in 2008 was trading at 101% to yield 7.49%. Adjusting about 15bp for the curve, Danamon has priced at an 11bp premium.
The question centres on whether BRI would have to pay a new issue premium. Many Asian deals are now completed without one. However, as one specialist points out, high yield credits nearly always have to pay at least 10bp, which implies Danamon has priced pretty much flat to BRI.
The effect of Temasek's ownership is seen clearly in the distribution figures for the deal. Although Singapore nearly always features heavily in Indonesian deals, Danamon's offering saw 83% placed into Asia, of which 55% went to Singapore. The remaining 16% of the overall deal went to Europe and 1% to offshore US. Of the remaining Asian demand, Hong Kong accounted for a further 23% and Indonesia 5%.
The order book closed at the $550 million level, with participation by 105 investors, a relatively large number. By investor type, funds accounted for 25%, banks 25%, retail 24% and insurance 26%.
The healthy level of oversubscription allowed pricing to be tightened from initial guidance around the 7.875% area. Initially some accounts were sensitive around these levels.
As one specialist explains, "Their argument was that Danamon remains an Indonesian bank subject to Indonesian credit risk no matter how much Temasek owns."
On a stand-alone basis, Danamon's credit ratios stand up well against its competitors. The only leading ratio where it loses out to BRI is NIM (Net Interest Margin), which stood at 7.1% in September last year compared to 9.1% for BRI and 3.5% for Mandiri (UBS figures).
In terms of ROE, it is much higher - 28.2% (September 2003) versus 26.6% (BRI) and 24.2% (Mandiri). In terms of NPL's it is much lower - 2.8% versus 6.7% and 7.2%. It is also much more strongly provisioned than the other two - 253% versus 143% and 184%.
Its loan to deposit ratio is also much higher - 71.35 versus 62% and 40.4% and it has a low ratio of government re-capitalization bonds on its books - 32% versus 29% and 52.4%.
It does, however, not have the same scale as a government-owned giant like Mandiri and its asset base stood at $5.24 billion (Rp45 trillion) in September compared to $10.8 billion (Rp93 trillion) for BRI and $29 billion (Rp250 trillion) for Mandiri.
Danamon executives have said they want to build up the bank's mass market and SME franchise. By the end of the year, they had already helped net profit shoot up 72% to $181 million.