RHB prices rights issue

RHB Capital's flagging share price was little moved on Tuesday after the Malaysian banking group finally priced its RM2.5 billion ($577 million) rights issue near the tight end of its indicative discount range.

In a filing on Monday, RHB Capital set the rights issue price at RM4.82 per rights shares, equating to a 20.3% discount to the RM6.03 theoretical ex-rights price. The company in April announced a discount range of 20% to 30% and has since seen its share price fall by more than quarter.

RHB Capital's share price ended Tuesday at RM5.94, 0.17% down on the previous day, having traded at RM8.20 on the day of the rights announcement and above RM9.00 in 2014, before a planned three-way merger with CIMB and Malaysia Building Society was called off.

At 16.7% the implied dilution to existing shareholders from the rights issue is greater than expected for some analysts. The greater dilution is the result of a lower-than-projected rights issue price and a higher level of issuance.

In a note, those at MIDF Amanah Investment Bank said the rights issue would reduce RHB Capital’s 2015 financial year earnings per share to 67 sen from 81 sen and its return on equity to 9.8% from 10.5%.

RHB Capital said it will issue one rights share for every five shares already held. The transaction is expected to complete by the end of October.

Had the rights issue been executed five months ago, before global equity markets began selling sold off, the dilution to existing shareholders would have been smaller at 13.2%, assuming the same 20.3% discount applied to the then theoretical ex-rights price.

As the rights shares are denominated in Malaysian ringgit, the company is also set to lose out in dollar terms because of the Malaysian currency's recent sharp slide. At the time of the announcement the proceeds would have been worth $680 million.

RHB Capital said it plans to use the funds raised to help repay the company’s RM3.1 billion external debt, targeting annual interest savings of RM88.4 million.

Reorganisation

The rights issue marks the first step of the RHB group's internal reorganisation and signals its intention to refocus on organic growth after its proposed tie-up with CIMB and MBSB collapsed.

The mega-merger was cancelled after prolonged discussions that dragged on from July last year to January, during which CIMB shares fell close to 20%.

There have been rumours of a new merger between RHB and AMMB Holdings but that was ruled out by RHB Capital chief executive officer Khairussalen Ramil, who has reiterated that the group will seek stand-alone business growth for the time being.

RHB Bank, a wholly-owned commercial banking unit of RHB Capital, will acquire the investment banking and insurance assets of its parent in the group reorganisation. RHB Capital will be liquidated and the listing status will be assumed by RHB Bank in January next year.

RHB Capital has been operating as a holding company but more than 90% of its net profit comes from the banking unit, which runs the fourth-largest banking network in Malaysia.

Because banks are restricted by capital requirements, the holding company structure has been adopted to grant RHB Bank extra debt capital by increasing RHB Capital’s leverage, a financial strategy commonly known as double leverage, according to a person familiar with the company.

With the liquidation of RHB Capital and the repayment of external debt, RHB Bank will be able to remove its double leverage, which stood at 134% as of the end of last year.

“The repayment of borrowings and the purchase of assets by RHB Bank will completely remove double leverage at the holding company level and eliminate the risk that RHB Bank will have to upstream more dividends to fund the holding company’s debt and dividend payments,”  Eugene Tarzimanov, a senior credit officer at Moody’s, said.

The rights issue will also boost RHB Bank’s capital to meet Basel III requirements.

Moody’s Tarzimanov said RHB Bank’s pro forma consolidated transitional common equity tier-1 ratio will improve to around 12% after the rights issue from 10.6% in December. That will put RHB Bank top among leading Malaysian banks in terms of capital buffers.

RHB Investment Bank is the principal adviser for the RHB Capital rights issue.