Maybank prices lower tier 2 debt issue

The 52.2% government-owned bank returns to the subordinated debt markets for the first time in seven years.

An increased ten non-call five offering was priced in London yesterday at the tight end of its indicative range to raise $380 million. Pricing of the Baa2/BBB- rated deal came at 99.888% on a coupon of 6.125% to yield 6.149% or 173bp over five-year Treasuries.

The challenge for lead managers JPMorgan and Deutsche Bank was how to re-position the credit as close as possible to the quasi-sovereign related curve when there was an outstanding bank capital deal for a higher rated Hong Kong credit trading significantly wider. Observers believe that final terms placed the deal as close to the Malaysian curve as demand allowed, although most believe that there is also potential for the deal to trade in well over time in the secondary market.

Standard & Poor's decision to lift Maybank's sub debt rating up from BB+ to BBB- also proved an enormous help to the deal. Both Moody's and Fitch rate the bank's senior and sub debt at the sovereign ceiling, whereas sub debt should normally fall one notch below. This means that the overall rating would be higher on a pure stand-alone basis and it enabled to sell the story more effectively as a leveraged sovereign play.

The two main pricing benchmarks were Malaysian electricity utility Tenaga Nasional Berhad and Hong Kong's Bank of East Asia (BoEA). The former has a 7.625% April 2007 bond with a one notch lower rating from Moody's of Baa3 and the same sovereign BBB rating from Standard & Poor's. This was quoted at the end of Asian trading yesterday at 125bp over Treasuries, to yield 5.67%. Maybank has, therefore, come 48bp wider.

The other major comparable is a February 2006 issue for BoEA, which has a one notch higher subordinated debt rating of BBB from Standard & Poor's and the same Baa2 rating from Moody's. This was quoted yesterday at 6.07% to yield 165bp over Treasuries. In yield terms, Maybank has, therefore, come 8bp back of BoEA.

However, while BoEA is still being quoted over a five-year Treasury its deal now has just under a four-years to run and the Treasury curve at the short end is currently very steep. With roughly 40bp to 50bp per annum on the curve, this would price a new BoEA deal around the 200bp level implying that Maybank has come just over 30bp through BoEA's theoretical new issue level. On an asset swap basis, observers say that pricing is also aggressive since BoEA translates to 165bp over Libor and Maybank to 129bp over.

Maybank itself has an outstanding deal and although it is now very illiquid, it partially reflects the market's view of the credit and set an important starting point for the trade. Indeed, as news of indicative pricing broke on May 22, the existing deal immediately traded in 20bp to stand as one of the best performing bonds of the day. Having then traded at 203bp over Treasuries, the 7.125% September 2005 issue was being quoted yesterday 185bp over Treasuries to yield 5.08%.

Observers report that the order book closed 3.25 times subscribed against the original deal size of $300 million and had over 80 investors. By geography, 75% of the deal was placed in Asia, of which 60% went to Singapore, 25% to Hong Kong, 10% to Korea and 5% other. The remaining 25% was placed in Europe. By investor type, funds accounted for 45%, private banking 25%, banks 20% and insurance companies 10%.

Maybank is also said to have capped the deal at $380 million because it did not want to increase its capital adequacy ratios any further. At the end of 2001, the bank reported a total CAR of 13.29% of which tier 1 equity accounted for 9.49%. The new deal will bring it up to the 14.61% mark.

The bank is said to view the tier 2 deal as a means of re-balancing its CAR and countering the amortisation of its outstanding 2005 deal. Under Malaysian law, it is not currently permitted to reduce tier 1 by buying back shares or paying out 100% of its net income as dividends. Typically it has paid out about 20% to 25%.

As of end 2001, the bank had assets of $39 billion, making it twice the size of its nearest competitor and served an estimated 25% of the Malaysian population either through the commercial bank, brokerage arm Mayban Securities, merchant banking arm Aseambankers, or Mayban Insurance, its recently established joint venture with Belgium's Fortis group.

It also reported a year-end NPL ratio of 15.8% and a coverage ratio of 69%, versus to a domestic average of 19.6% and 55%. Furthermore, Maybank is renowned for its strict provisioning since it operates on a three-month past due basis rather than the six-months required by the domestic regulator. It also provisions against any shortfall in collateral upfront. Analysts also say that a large increase in NPLs from 11.01% at the end of 2000 can be attributed to its acquisition of PhileoAllied Bank and Pacific Bank under the government's consolidation drive.