Thai Military Bank prices hybrid wide of initial guidance

Thai Military Bank prices Thailand's first ever hybrid tier 1 deal in an effort to lower its cost of capital.
Thai Military Bank completed an upsized $200 million hybrid tier 1 deal, Thailand's first, on Wednesday (April 26) via Barclays Capital and DBS Bank. Having initially marketed the deal based on an issue size of around $175 million, the Ba2/BB- rated transaction was increased to $200 million, the maximum limit established by the Bank of ThailandÆs guidelines governing hybrid tier 1 securities.

Based on a perpetual non-call 10 structure, the deal was priced at par on a coupon of 7.75% to yield 263.3bp over Treasuries or 213bp over swaps. The notes revert to a floating rate with a step up of 100bps if they are not called on the 10-year call date.

However pricing at this level comes wide of initial guidance of between 175bp to 200bp over swaps.

Some bankers familiar with the deal speculate that the reason why the deal had to push out past the wide end of guidance was an inherent weakness in the deals underlying structure.

ôStructurally the deal has two major weaknesses,ö says one DCM banker familiar with the deal. ôFirst it has a mandatory coupon deferral clause that kicks in if the bank posts an accounting loss over a six month period. Secondly, the deal lacks any dividend stopper, meaning that even if the company is not required to make a coupon payment based on the six-month profit test, it is still allowed to pay a common equity dividend.

ôThe six-month profit test engenders an incredible amount of volatility into this deal. Obviously it will be subject to the intrinsic cyclical nature of the business, and secondly, what is to stop the business from presenting accounting results that would avoid having to pay the coupon? I think this would have been a difficult deal for the leads to complete. Unfortunately, it appears as though the regulators forced this type of structure on them."

The final order book closed close to the $400 million mark, with geographic allocations split 52% into Europe, and 48% into Asia. The European book was heavily weighted to UK-based accounts, with accounts from Switzerland, France and the Netherlands also participating. The Asian book was broken down 30% Singapore, 9% Hong Kong, 9% other.

Hybrid Tier 1 is the most cost effective form of tier 1 capital available to banks. This offering will therefore lower TMBÆs cost of capital, which will enhance ROE, EPS and other measures of shareholder value.

At the end of 2005, TMB recorded a total CAR of 10.9% of which tier 1 capital accounted for 7%. Prior to completing the new deal, TMBÆs CAR stood at 11.7%. With the completion of the new deal, it is expected to rise to 14.1%.

Additionally with the issuance of 3.22 billion shares via a rights issue, TMBÆs tier 1 capital is set to strengthen to 10.3% from 8%.

TMB plans to reduce its non-performing loan (NPL) ratio to 6% of total loans from the current 12% by the end of the year, and has set aside provisions to help to improve its coverage ratio to a level that is more in line with its peers.

TMB, ThailandÆs fifth largest lender - with assets of Bt717 billion (19 billion) - is majority owned by the Thai government, which controls a 31.2% stake in the bank. SingaporeÆs DBS owns 16.1%, while the Thai military owns 5%.

¬ Haymarket Media Limited. All rights reserved.
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