Roadshows begin in Hong Kong today (March 16) for a $250 million upper tier 2 issue by Thai Military Bank (TMB). The 10 non-call five Reg S deal is being led by DBS and JPMorgan, with pricing scheduled for Friday.
The deal marks the first true benchmark from the Thai banking sector since Bangkok Bank's $716.7 million exchange offering in January 1999. Issuance is being driven by TMB's efforts to clean up its balance sheet following a three-way merger last September.
This saw Thai Military Bank, DBS Thai Danu and the Industrial Finance Corporation of Thailand (IFCT) bought together to create the country's fifth largest bank by assets - $17 billion at the end of the year. JPMorgan was the advisor to DBS.
At the end of 2004, TMB recorded a total CAR of 8.79% of which tier 1 capital accounted for 6.02%. The new deal, together with a Bt8 billion lower tier 2 deal issued in January, should boost the bank up to 12%. This will enable it to continue with its clean-up efforts and pave the way for a new equity issue so that it can expand its loan book.
In particular it wants to reduce NPLs from 12.5% at the end of 2004 to 7% at the end of 2005. At the end of 2004 it made a Bt4.5 billion write-down, which killed profits for the full financial year and resulted in an ROE of just 2.6%.
TMB is described as a work in progress by analysts, some of whom compare it to Korea First Bank (KFB) shortly after Newbridge took control. In terms of ratings, KFB should provide one benchmark for TMB since the former's upper tier 2 deal due March 2013 deal callable in 2008 has a rating of Ba1/BB/BBB- (Moody's/S&P/Fitch). This is three notches higher on the Fitch side than TMB, whose issue will have a Ba1/BB- rating.
However, KFB is now benefitting from the Standard Chartered halo effect and is currently bid at 102.25% on a yield of 4.93%. This equates to 121bp over Treasuries and 58bp over Libor.
Some bankers suggest the Malaysian banks may provide a better starting point for TMB's indicative pricing. For example, Southern Bank's 6.125% lower tier 2 deal due in June 2014 deal and callable in 2009 has a Baa3/BBB rating. The deal is currently bid at 103.70% on a yield of 5.02%. This equates to 60bp over Libor.
Typically, there is a 25bp to 30bp differential between upper and lower tier 2 debt, which would price an upper tier 2 deal in the 85bp to 90bp range.
What Southern Bank has in its favour is a wider investor base since Malaysian banks can buy each other's sub debt without taking a hit against their own capital.
What TMB has in its favour is huge rarity value, the halo effect of DBS's partial and active ownership, a larger asset base and an improving credit profile. The Singaporean bank currently owns 16.1% of TMB, while the Thai government holds 31.2% and the military 7.1%.
Thailand first unveiled regulations for upper tier 2 debt in August 2000. These state that interest payments are deferred in the event of a loss or cessation of dividends. This is a slightly harsher test than Korea, which uses CAR as the main test. The regulations also state that interest and principal payments are stopped in the event that the Bank of Thailand intervenes in the bank's operations by ordering a capital write-down and increase.