Southern Bank Berhad, Malaysia's ninth largest bank by assets, completed an upsized $200 million hybrid tier 1 deal on Wednesday (October 26) via UBS. Having initially marketed the deal based on an issue size of $150 million, the Ba2/BB+ rated transaction was increased by $50 million after attracting an order book around the $600 million mark.
Based on a perpetual non-call 10 structure, the deal was priced at par on a coupon of 6.62% to yield 203bp over Treasuries, or 153bp over swaps. Pricing at this level also came through initial guidance between 155bp to 160bp over swaps.
The main pricing benchmark was the bank's outstanding 6.125% June 2009 lower tier 2 deal, which was trading at 90bp over swaps at the time of pricing. This deal has been a strong performer in the year-and-a-quarter since launch, tightening from a launch spread of 188bp of swaps.
Specialists say the differential between lower tier 2 debt and hybrid tier 1 debt for cross over credits can range from as low as 34bp to as high as 112bp over. In this case, Southern Bank achieved a 63bp differential.
The closest benchmark outside of Malaysia is Korea's Shinhan Bank, which issued a 5.663% $300 million extendible 30-year deal with a call option in year ten in February. This bond has a slightly higher rating of Baa3/BB+/BBB- than Southern Bank and is currently trading at a 50bp differential to the bank's lower tier 2 debt.
On a like-for-like basis, Southern Bank's differential would be tighter, however, since the comparison is being made between a 2009 maturity and a 2015 maturity. Shinhan's lower tier 2 deal, on the other hand, has a 2013 maturity, while its hybrid tier 1 deal a 2015 maturity.
In what remains a relatively flaccid market, Southern Bank was able to rouse a relatively firm, though concentrated order book, with participation by 37 investors. By geography, 62% came from Singapore, 12% from Hong Kong and 26% from Europe.
By investor type, 45% went to asset managers, 45% to banks and 10% to insurance companies.
Funding officials say Southern Bank wanted to issue a hybrid deal to bolster the bank's tier 1 capital ratio. Pre deal the bank had an overall CAR of 15% of which tier 1 accounted for 10%. Post deal, CAR will rise to 17.5%.
The bank chose a hybrid for a number of reasons. Firstly a hybrid represents a cheaper form of capital than straight equity because it is tax deductible (hybrids are priced and traded like debt, but treated as equity on a bank's balance sheet).
Secondly, the bank is getting full up on tier 2 debt. The latter currently accounts for 40% of tier 1 equity, versus a regulatory threshold of 50%.
Thirdly and most importantly, Southern Bank has made a number of acquisitions in recent years that have impacted its capital. As one funding official states, "We've made nine acquisitions in the last five years and wanted an equity buffer to handle future non-organic growth. Optimally, we believe a tier 1 ratio of 9% to 10% would be ideal. But at the moment, we'd like to keep the level slightly higher to take account of potential acquisitions."
Earlier this summer Southern Bank made an M$2.1 billion ($555 million) bid for Singapore's Asia General Holdings. However, officials say the bank had already been preparing for a transaction ahead of this.
"We've been interested in raising hybrid capital since Bank Negara released preliminary guidelines last December," he states. "It's about taking our financial management of the bank one step further. We viewed it as an opportunity to diversify our capital base and bring down our overall cost of capital."
The main complicating factor was an unsolicited bid for Southern Bank that became public last Friday, but failed to deter investor demand. CIMB, Malaysia's largest investment bank, released a statement saying it had been given regulatory permission to open merger talks with Southern. The latter's board subsequently put out its own statement saying the bid was not solicited.
Analysts have concluded that this highlights division within the Southern board. Two large shareholders - Syed Moh'd Yusof and Sultan Sharafuddin Idris Shah - are said to be keen on the merger, while others want to grow Southern Bank into a bigger financial powerhouse on its own.
The bank currently has an asset base of M$31.8 billion ($8.4 billion) and a strong niche in three areas: wealth management; consumer finance and SME finance.