BDO Unibank sets rights issue price at 24.9% discount

BDO Unibank, the Philippines’ biggest bank in terms of total assets, has fixed the price for its upcoming rights issue at Ps48.60 per share. The price represents a 24.9% discount to its 15-day volume-weighted average price (VWAP) and will see the bank raise about Ps43.5 billion ($1 billion).

The discount is close to the maximum proposed by the bank when it first announced details of the offering almost two weeks ago. At the time it said it would sell the new shares at a discount of up to 20% to 25% versus the 10- to 15-day VWAP.

The price represents a discount of about 20% versus the theoretical ex-rights price (Terp), which works out at approximately Ps60.86 based on Monday’s closing price.

The deal is fully underwritten and will become the biggest rights issue ever in the Philippines, ahead of the $328 million offering by First Gen Corp in January 2010, Dealogic data show. It will also rank as the largest Philippine equity capital markets transaction on record.

The one-for-three share offering will result in the issuance of about 895.2 million new shares.

In a May 28 press release announcing the Philippine Stock Exchange’s approval of the $1 billion rights offering, the bank said that its controlling shareholder SM Investments Corp (SMIC) and its strategic investors, IFC and United Overseas Bank (UOB), have expressed their support for the expansion plans and the proposed rights issue. And SMIC has committed to subscribe to at least its full entitlement, it said in the same release.

As of last night it was still unclear whether SMIC may also subscribe to additional shares in the offering, and whether IFC and UOB will take up their respective entitlements. Sources have earlier said that the SM Group together with the two strategic investors were expected to subscribe to about 65% of the deal.

As of the end of March this year, SMIC owned about 41% of BDO Unibank on its own and together with other affiliates, the SM Group held 58.56%, according to a rights offer prospectus issued in late May. The SM Group is one of the biggest conglomerates in the Philippines with substantial interests in financial services, real estate development, and tourism and entertainment.

The portion of the offering not taken up by existing shareholders through their respective entitlements or additional subscriptions will be underwritten by five banks: BDO Capital, which acts as the issue manager and domestic underwriter; and Citi, Deutsche Bank, J.P. Morgan and UOB, which are joint international lead managers and international underwriters.

The share price initially gained on news of the rights issue in early April, but has been volatile in the past month as global equity markets have tumbled. Yesterday it inched up 0.2% to close at Ps65.05. Still, the stock has climbed about 45% from its lows at the end of September last year and is up more than 13% so far this year.

BDO Unibank is raising money to strengthen its core tier-1 capital ahead of the introduction of more stringent Basel III guidelines. The Philippine central bank is proposing to raise the minimum capital adequacy ratio (CAR) to 12.5% from 10% and to double the tier-1 ratio to 10% from 5% as of January 2014.

Although BDO Unibank’s capital ratios are currently slightly above the new minimums — it has a consolidated CAR of 15.6% and a tier-1 ratio of 10.2% — it has said the additional capital raising will provide it with a buffer to allow it to sustain its growth momentum.

After the rights issue, the bank’s tier-1 ratio will likely rise to around 15% to 16%, one source said. Key arguments for participating in the rights offering, the source added, include BDO Unibank’s steady growth, as well as its good margins and low non-performing loan (NPL) ratio.

In 2011, BDO Unibank’s gross NPL ratio declined to 3.4% from 4.7% at the end of 2010 and its NPL coverage ratio improved to 106% from 92%.

The Philippines Stock Exchange’s PSEi Index has bucked the downward global trend on the back of the country’s growth prospects, gaining about 13% so far this year, while the most other global markets have lost ground due to worries about the eurozone debt crisis and signs of a slowdown in China.

The Philippine government is expecting the country’s GDP to grow by 5% to 6% this year, compared to 3.7% growth in 2011, due to rising domestic demand driven by remittances from overseas workers and public spending.

The financial sector in the Philippines has been resilient to the global turbulence, so far, and has only limited exposure to Europe, the IMF said in a March report. But it warned that contagion could occur through pullbacks of credit by European banks. Also, the prominent role of conglomerates as recipients of bank credit and the high leverage in parts of the corporate sector, call for a close monitoring of conglomerates, it said.

The record date for the rights issue will be June 14 and the shares will start trading without the rights to participate in the offering on Friday. The offer period will run from June 18 to 27 and the rights shares are expected to list on the Philippine Stock Exchange on July 4.