DBS rights issue sets scene for others to follow

A generous discount and modest exposure to the financial crisis create strong interest, resulting in Singapore's first rights issue this year being 118% covered.
DBS Group has announced that its S$4.1 billion ($2.7 billion) rights issue was 118.8% subscribed, including excess applications. The news confirms the success of DBS's fundraising exercise at a time when many of its financial peers in Europe and the US have been forced to seek bailout capital from their respective governments.

The support for DBSÆs rights issue û it received close to 27,500 acceptances and was 98.9% covered even without excess applications û was evident throughout the three-week offering period with the share price holding well above the rights price from beginning to end. When the offer closed on January 20, the share price was 3.5% higher than the theoretical ex-rights price before the announcement of the deal on December 22, despite the fact that banks in general were under pressure during this time due to concerns about more losses and fundraising needs.

The fact that Singapore-based DBS has been relatively less affected by the financial crisis than its European and US counterparts and set out to strengthen its capital base before being forced to do so no doubt helped underpin the interest.

When it announced the rights offer, DBS stressed that it was undertaking this capital raising ôfrom a position of strengthö and noted that its business continues to perform well despite the challenges of the global economic downturn.

ôNotwithstanding the market turbulence, we continue to experience strong deposit growth, high quality loan demand and better loan spreads, all of which strengthen profitability in the core lending franchise,ö the bank said, and then added: ôWe have always been pro-active and prudent in capital management. The board of directors and management have carefully evaluated the groupÆs capital position in light of our business strategy and believe that the rights issue to raise approximately S$4 billion will address market expectations for higher capital levels for financial institutions globally.ö

Observers noted that it was smart to come early in the new year, since there is no telling whether the market will be better or worse in a couple of monthsÆ time. Also, the situation can change very quickly in the current environment and a bank that looks okay one quarter may well need capital the next due to its exposure to collapsing assets or a defaulting company. And once a bank is pushed against the wall it becomes much harder to raise capital.

ôYou can never take access to investors for granted,ö says one Singapore-based banker. ôSo being the first one out in the new year is a good thing.ö

By offering the shares at a generous 45% discount versus the market price just before the announcement, DBS also ensured the deal would be a tough one for its shareholders to ignore. The same approach was used by Standard Chartered on its $2.7 billion rights issue last month, which was offered at a 49% discount and ended up 97% subscribed.

While it isnÆt strange that DBS would choose to copy Standard CharteredÆs successful offering, the two banks also have a common denominator in the form of Temasek being the largest shareholder in both banks. But given the strong turnout for both issues, they may also have set the trend for other Asian banks and companies looking to raise capital through rights issues. Last week, there were reports that IndonesiaÆs Bank Danamon has mandated Citi and Morgan Stanley to help it raise about $300 million from its existing shareholders and there have also been rumours about other Singaporean companies, including OCBC and CapitaLand, having plans for rights issues.

Rights issues are seen as the best option for companies wanting to raise new equity in size at the moment as the stockmarkets are expected to remain challenging for the next six months. A key benefit with a rights issue is that a company can offer the shares at a very steep discount without it having much impact on the share price since there is no dilution for participating shareholders.

DBS offered approximately 760.48 million rights shares on the basis of one new share for every two existing ones at a price of S$5.42 apiece. This equalled a discount of 45% to the December 19 closing price of S$9.85 and a 35% discount to the theoretical ex-rights price of S$8.37. The shares started trading ex-rights on December 29.

To increase the likelihood of success, the nil-paid rights were tradable on the Singapore Exchange from January 6 to 14 and people close to the deal say the trading volume in these instruments was strong most days, showing good interest by investors who didnÆt already own shares in the bank. As a service to foreign shareholders, who might otherwise not have been able to participate in a Singapore rights issue, 2.6 million nil-paid rights that would have been allotted to these shareholders were also sold on the Singapore Exchange and the net proceeds then passed on to them û thus enabling them to accumulate shares in the market should they wish to do so. There was also a private placement to some US investors, at the discretion of DBS.

Another important factor underpinning the issue was the support of Temasek. The Singapore investment company owns 27.6% of DBS and before launch committed not only to take up its entitlement in full, but also to underwrite a further 5.7% of the total issue for a maximum 33.3% take-up. While not that large in percentage terms, this was the most Temasek could have bought without exceeding the 30% share ownership limit and triggering a general offer.

The rest of the issue was underwritten by Citi, Goldman Sachs, J.P. Morgan, Morgan Stanley and UBS, which also acted as joint bookrunners together with DBS.

After the two Indian rights issues for Hindalco and Tata Motors in October, which were both well undersubscribed and left the underwriters holding large chunks of shares, there was speculation that international investment banks would be reluctant to act as underwriters of any more rights issues as long as the market environment remained volatile. However, DBSÆs high profile in this region meant most banks felt this was something they ôhad toö participate in, especially since a successful outcome here could mean a ticket on some of the other rights issues expected in the coming months. The five banks reduced the underwriting risks by sub-underwriting parts of their commitment just before Christmas. Sources say there was strong interest in the sub-underwriting role from both existing DBS shareholders and new investors and also by both long-only accounts and hedge funds.

The purpose of the rights issue, according to DBS, was to increase the bankÆs tier-1 capital. At the end of September, the consolidated core tier-1 ratio (tier-1 less qualifying preferred and hybrid instruments) was 7.8%, while the tier-1 ratio was 9.7%. After adjusting for the estimated net proceeds of the rights issue, the pro forma consolidated core tier-1 and tier-1 ratios (as of end-September) are expected to increase to 9.9% and 11.8%, respectively.

DBS also said that its asset quality is healthy, with a non-performing loan ratio of 1.3% and a non-performing assets allowance coverage of 123%. The group also has a strong liquidity position underpinned by a loan-to-deposit ratio of 76.6% û all measured as of September 30, 2008.

The net proceeds from the rights issue will be used for general corporate funding purposes, including funding of loans to customers, discharging, reducing or retiring the indebtedness of the group and investing in financial assets.

ôA stronger capital position will also provide the group with a critical source of differentiation, allowing us to take advantage of growth opportunities in the current environment. This includes strengthening our customer relationships, seeking out new customers and selectively growing our loan book to increase market share and profitability,ö the bank said in the offer document. ôWe intend to extend our leadership in Singapore and Hong Kong and invest in key growth markets of China, Taiwan, India and Indonesia. Organic growth remains a priority for the group, and the capital raising is not intended for any merger and acquisition activity or any extraordinary provisions.ö

Despite the more positive picture, DBS has by no means been immune to the financial crisis though, and its share price is down 49% since its 2008 high of S$17.67 in early May. In the third quarter of 2008, the bank made allowances of S$235 million against its S$263 million investment portfolio of asset-backed collateralised debt obligations (CDO), and as a precautionary measure in light of heightened macroeconomic risks, allowances of S$213 million were also made against its still performing S$871 million portfolio of non-asset-backed CDOs. At the end of the third quarter, DBSÆs non-performing loans amounted to 1.3% of gross customer loans, while total loss allowances amounted to 123% of non-performing assets and 209% of unsecured NPAs.

The bank has warned that any worsening of the global and regional economic conditions, in Singapore and Hong Kong in particular, may lead to an increase in non-performing assets in the future. Increases in non-performing assets over recent quarters have come largely from SME loans in Hong Kong and Greater China, as well as private banking loans. A significant portion of the groupÆs loan portfolio is also secured by real estate, which means that in the event of a downturn in the real estate markets, a portion of the groupÆs loans may exceed the value of the underlying collateral.

DBSÆs share price gained 7.3% to S$8.99 when it resumed trading after the Lunar New Year holidays yesterday û the first trading day since it announced the outcome of the rights issue. However, yesterday was generally a strong day for Asian financial stocks, which means the gains may not have been related to the rights issue.
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