HEARD IN ASIA Deutsche Morgan Takes On Bangkok Bank Bond Issue
April 03, 2011
It has been dubbed ``Mission: Almost Impossible'' by some Asian capital-markets pros: a blockbuster $350 million to $400 million convertible-bond issue from Bangkok Bank, starring Deutsche Morgan Grenfell in the role of lead manager, plus plenty of special effects, and now showing to international investor audiences around the world. It is a gripping tale of cut-and-thrust among capital-markets folks. Hero Deutsche Morgan Grenfell has been given the task of raising a very large sum of money for Thailand's leading commercial bank. But Asian markets are jittery on rumors of a possible rise in U.S. interest rates. In fact, many of the investment banks involved in the transaction say potential investors are vanishing without a trace. With the issue set to be priced on Wednesday, critics are calling this deal ``ambitious'' and ``complex'' while investment bankers are wondering whether the mission can be accomplished. That is not to say Bangkok Bank is without its fans. In recent months, equity analysts and investors have grown increasingly concerned about the state of the Thai property market, and the degree to which Thai banks are exposed to property companies. Bank equity analysts such as Goldman Sachs (Asia)'s Rozanne Reynaldo have stressed the need for investors to focus on asset quality in the Thai banking sector. A research report this month by SBC Warburg, a division of Swiss Bank Corp., notes that Bangkok Bank's ``loan quality is among the highest in the sector. Provisioning is considered more than adequate to cover an increase in doubtful accounts.'' That is one reason why foreigners like the stock; Bangkok Bank's foreign shares trade at a premium of as much as 50% to the local stock price. (Foreigners can own only 25% of Bangkok Bank's shares.) Among bond investors, Bangkok Bank is highly regarded, boasting a credit rating of A minus from Standard & Poor's on its long-term foreign-currency debt. ``People love the company, they are very familiar with it,'' says a banker at Deutsche Morgan Grenfell in Hong Kong who is involved in the deal. She says Deutsche Morgan Grenfell has had a ``very good response'' from the roadshow so far, and that investors in Europe have expressed considerable interest in the deal. That isn't an experience echoed by other participating banks. They say it is proving an uphill struggle to sell the bonds, and they note that investors balked at the aggressive indicated pricing of a convertible bond issue for Korea Electric Power (known as Kepco) recently, with the result that pricing for the deal has been postponed. However, most of the banks agree that Deutsche Morgan Grenfell must have proposed the terms knowing that it had some good lead orders for Bangkok Bank's bonds. But for some convertible-bond specialists, the indicated terms for Bangkok Bank's bond issue don't look especially appetizing. ``In my opinion, this is priced very aggressively,'' says Dominique Hopp, who runs a convertible bond fund out of Hong Kong for Invesco Asia. ``I'd like to see them lower the pricing -- they should have a more attractive coupon or more generous yield.'' Adds one analyst who specializes in Asian convertible bonds: ``It's definitely not cheap, but then Bangkok Bank is a high-profile name and one of the better-performing companies. It's a name a lot of investors like.'' Bangkok Bank is issuing convertible bonds with a 10-year maturity and an indicated coupon of 1% to 1.5%, payable annually. The bonds can be converted into a basket of shares, consisting of one foreign share and three local shares. That gives an indicated conversion premium (the amount that a convertible is priced over the value of its underlying stock) of 20% to 24%, based solely on the domestic share price. That premium is considered high compared with other issues, bankers say. However, based on the blended basket of foreign and local shares, the effective conversion premium is a more attractive 6.4% to 9.8%. The conversion price (or the price at which shares will be issued upon conversion) is 276 baht ($10.90) to 285 baht per share; Bangkok Bank's stock closed Friday at 226 baht. The instrument has various bells and whistles. For a start, Bangkok Bank has the right to convert some or all of the bonds after five years if the share price exceeds 140% of the conversion price for 20 out of 30 consecutive trading days. There's also a mandatory redemption feature in which the bank redeems the bonds at a mandatory redemption price (indicated at 123.5% to 127.9% of par) after five years if the U.S.-dollar-equivalent share price at the time is less than this level. This provides investors with some downside protection, convertible-bond experts point out. However, that mandatory redemption feature disappears if the stock price rises to the ``knock-out'' level of 7% above the mandatory redemption price. ``Given that Asian markets can be terribly volatile, you'd need to keep your eye on where the stock was trading, because if it reached the knock-out level and then fell back, you wouldn't enjoy the mandatory redemption feature,'' points out one banker. ``This isn't the kind of bond you can put in a drawer and forget about.'' Less appealing is the yield-to-mandatory redemption, which is being set at between 80 basis points and 105 basis points below five-year U.S. Treasury bonds. While that has raised plenty of eyebrows, a banker at Deutsche Morgan Grenfell says it is ``not aggressive.'' The bonds will be listed on the London Stock Exchange. Some bankers warn that the issue is more likely to appeal to asset-strippers than to conventional convertible bond investors, with the result that some of the bonds will effectively be removed from the market and cease to trade in convertible-bond form. (Asset-strippers are usually banks that split the convertible bond into its fixed income and equity components.) From Bangkok Bank's point of view, the new deal would enable it to borrow money very cheaply (compared with domestic interest rates), benefiting the bank's overall cost of funds. With the possibility of a rise in U.S. interest rates later this year, it makes sense for the bank to lock into relatively low U.S. dollar interest rates now. But for investors, it is not a compelling buy, convertible bond specialists conclude.
