Maybank sets rights issue price

Malaysia's largest lender lives up to its promise and offers the shares at a 34.4% discount to the theoretical ex-rights price, but fails to halt the slide in its stock.

Malayan Banking, or Maybank, has fixed the issue price of its upcoming M$6 billion ($1.6 billion) rights offering at M$2.74 per share, offering shareholders a chance to increase their holdings at a 43.2% discount to last Thursday's close of M$4.82.

The price, which was announced before the opening of trading Friday, represents a 34.4% discount to the theoretical ex-rights price of M$4.17 per share, which is in line with the Malaysian bank's earlier promise of a 30%-40% discount. It is also on par with DBS's $2.7 billion rights issue in January, which was offered at a 35% discount to the theoretical ex-rights price. The ongoing rights issues for Singapore developer CapitaLand and Indonesia's Bank Danamon are also offered at discounts of 35% and 34%, respectively, while CapitaMall Trust is offering its shares at a 28.7% discount to the theoretical ex-rights price.

It is somewhat surprising that Maybank has chosen to fix the price this early since it could result in the rights offering becoming less attractive should the market take a turn for the worse between now and the opening of the offer. The deal will need to be approved by existing shareholders at an extraordinary general meeting, which sources say is currently expected to be held on March 25 and subscription isn't due to open until early April. And since the bank chose not to set a price when it first announced the offering on February 27 it could have waited until closer to those dates before committing.

However, people close to the bank -- Malaysia's largest lender by assets -- say it wanted to firm up the underwriting to ensure there was no uncertainty that it would be able to raise the full amount. This also means that it can include the specific price in the offering circular that is about to be sent out to its shareholders this week.

The announcement met with a negative reaction in the market with the stock losing another 5.8% on Friday. (The Kuala Lumpur stockmarket was closed yesterday for a public holiday). The share price has fallen every day since the rights issue was first announced on February 27, shedding a total of 11%. Some of this may be due to the significant dilution that will have to be digested by investors who choose not to take up their entitlements in the offering, but Maybank is obviously also affected by the general slump in global stockmarkets in reaction to recent data suggesting a worsening economic situation.

In Malaysia specifically, the government is due to announce a second stimulus package today to try to prevent the economy from sliding into a recession. The package is expected to be larger than the M$7 billion economic stabilisation package unveiled in November and the consensus appears to be that it will contain M$10 billion to M$15 billion of new measures. According to economists at Citi this would translate into roughly 1.5%-2% of GDP.

People familiar with the offering say they expect it to see good interest among existing shareholders, including foreign institutional investors who own about a tenth of the company. The bank has already secured the support of its largest owners, although last Thursday's statement revealed that such commitments comprise only 55.7% of the proposed rights issue -- not 69.4% as it said when the issue was announced a week earlier. The difference is due to The Employees Provident Fund (EPF), which holds 13.7%, now saying that it will subscribe for its entitlement only if the market price stays above the rights issue price of M$2.74. This is a highly unusual "undertaking" and one that cannot really be described as a commitment since it suggests that at a time when Maybank needs the support of its largest shareholders most (typically minority shareholders will not participate in a rights offering if they can buy the shares cheaper in the market), it cannot be sure that EPF will be there.

However, one source says there are technical reasons for why EPF cannot undertake to buy the shares above the market price and the fund still intends to take up its portion of the offering irrespective of what happens to the share price in the meantime. For now though, this 13.7% of the offering will not be underwritten, adding a certain element of risk for Maybank -- although to be fair this will really only become an issue if the share price drops below the rights offer price. The bank said in the statement that it will still proceed with the proposed offering in the "unlikely event the EPF portion is not taken up".

The other undertakings remain unchanged. Permodalan Nasional Berhad (PNB) will take up its 5.9% entitlement and Skim Amanah Saham Bumiputera (ASB), which is a unit of PNB, will buy its portion of 45.6%. The rest of the commitments that will bring the total firm undertakings to 55.7% come from smaller funds under ASB. On top of that, PNB will apply for an excess allocation of up to 20%.

According to Maybank, it has also obtained underwriting agreements from MIDF Amanah Investment Bank, another subsidiary of PNB, and from RHB Investment Bank, which are referred to as joint lead underwriters. They are not lead managers for the offering, however, as that job is being handled by Credit Suisse, Goldman Sachs and Maybank IB. According to sources, the two international banks will also underwrite just over 8% of the issue.

Maybank will issue up to 2.212 billion rights shares on the basis of nine new shares for every 20 existing shares. The offering is expected to be completed by the end of April.

Maybank is referring to the rights issue as a pre-emptive move to further optimise its capital structure and strengthen its balance sheet to enhance shareholder value. The bank made several acquisitions around the region last year that have put some pressure on its finances, but the new issue will also "address market expectations for higher capital levels for financial institutions globally", the bank has said. 

Following the rights issue, the bank's core capital ratio will increase to 11.01% from 8.13%, while its risk-weighted capital ratio will improve to 16.42% from 13.54%, based on the end-2008 results. Its gearing ratio will drop to 0.58 times from 0.77, based on the balance sheet for the fiscal year to June 2008 adjusted for "certain material transactions". The money raised will be used for working capital and general banking purposes.

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