After a long wait, Thai Military Bank, ThailandÆs sixth largest bank, finally got the new capital it needed to fix its balance sheet when it completed an innovative share financing at the end of last week. The restructuring plan was structured in a complicated three- step process - all of which happened concurrently.
The first step in the deal asked existing shareholders to take part in a rights issue, where they bought 3 new shares for each 10 existing shares they held. That effectively raised the number of bankÆs shares from 1 billion to 1.3 billion. The second part of the deal offered 691 million new shares to new strategic investors and 1,992 million shares to ThailandÆs Finance Ministry. The third part of the deal gave all shareholders, barring the Finance Ministry, free warrants that are convertible into equity over time.
The first two parts of the deal allowed Thai Military Bank to raise Bt29.9 billion ($760.8 million) through its share sale effort. The finance ministry became the single largest shareholder, taking up a 49% stake in the bank in exchange for taking up two-thirds of the new shares. The military saw its stake whittled down from 42% to 13%. And about one-fifth of Thai Military ended up with four investors: the Shin telecoms group; Thai Life Insurance, National Finance and whiskey tycoon Charoen Siriwattanapakdi. The rest went to the retail investors.
The recap plan was marketed to local investors. An earlier recap plan, managed by Credit Suisse First Boston, failed to woo foreign investors last November and had to be scrapped because of poor demand by foreign investors. Salomon Smith Barney, hired in February, decided on the local investor route. Thai Military sold all the shares it needed to sell. But by its pricing shares at Bt10 - 22% higher than their market price at the time - meant that existing shareholders (the Thai military included) didnÆt take up their allotted new shares. ôExisting shareholders could pick up the shares at a lower price in the market. Most of those shares will be picked up by National Finance,ö said an analyst in Bangkok.
A warranted success
The third part of the deal involved a warrant sweetener. With every new share they get, shareholders receive two warrants. Each warrant gives shareholders the chance to buy the Ministry of Finance preference shares within three years. This gives the Finance Ministry a route out of the bank. The warrants, analyst say, are priced at Bt11.13. Assuming all other shareholders take up the warrants offer, the shareholding structure could be very different in three years. The Thai Military, which has always run this bank, will see its stake shrink even further. But the overwhelming control, an enlarged 51.8% control, will shift towards Thai Military Bank's new pool of strategic investors.
"One reason for the deal's success was that there was no imposed minimum on foreign investors to take up shares, which means that the primary reason for its success was that there was plenty of local demand, so much so that foreign investors who were briefed on the deal couldn't get their hands on the shares because there were none left for sale," said Donaldson Hartman, regional banking analyst at Salomon Smith Barney, which was adviser to the deal.
The new capital will go along way in plugging the holes in its balance sheet, analysts say. Bank executives have already said the new funds will completely solve its NPL problem, which make up 30% of its total loans, while another portion will go towards paying a new unit that will buy bad loans at a discount from the bank and manage them. Bank executives also reckon thereÆs sufficient funds to start growing their loan book again.
Military History
Like other Thai banks, Thai Military was affected by the near collapse of the economy after the devaluation of the bath in mid-1997. Recapitalising the nationÆs banks remains the top priority of ThailandÆs leaders, as the recovery process has been hindered by banksÆ inability to lend due to crippling bad debts. Gross non-performing loans, including restructured loans, are 60% of total loans in the banking system.
In Thai MilitaryÆs case, the recent recap was all-important to its survival. Last year, depositers withdrew a total of Bt21 billion, or 7% of its deposits. Thai Military had to borrow Bt14 billion to offset its financing problems. At the same time, a surge in bad debts and loan write-offs forced the bank to report a loss of Bt11.6 billion. Thai Military took a massive hit on its equity. Its equity declined nearly 58% to Bt8.8 billion at end-1999.
ôThe recapitalisation helps. The question is whether they have raised enough to cover provisions in the future,ö says Scott Christensen, regional banking analyst for Jardine Fleming in Bangkok. Despite these efforts and the new funds, the market remains concerned whether Thai Military has enough funds to be able to provision for bad debt aggressively when the time comes. Investors are comparing their loan-loss provisions to two other banks - Thai Farmers Bank and Siam Commercial Bank. Both these banks have raised their loan-loss provisions compared to their peak NPLs.
ôThai Farmers and SCB have met the governmentÆs target, while Thai MilitaryÆs provisions are only 70% of the current requirement,ö said an analyst, who declined to be named.
