An increased $150 million lower tier 2 transaction was completed at Asia's close on Friday by lead managers JPMorgan and BNI Sekuritas. The 10 non-call five transaction was priced at 99.041% on a coupon of 10% to yield 10.25% or 740bp over Treasuries. Should the transaction fail to be called at year-five, the spread steps up to 1,100bp. Fees total 1%.
Pricing came at a slight new issue premium to Bank Mandiri, whose recent tier 2 transaction was yielding 9.99%, equating to 715bp over Treasuries. In absolute terms, however, BNI has secured itself a much more cost effective deal by waiting just three-and-a-half months and taking advantage of further US interest rate cuts.
Mandiri priced a $125 million deal in late July via UBS Warburg at 99.147% with a coupon of 10.625% to yield 10.85% equating to 747bp over Treasuries.
Most market participants believe that although BNI and Mandiri have the same rating, the former should trade at a premium to the latter as it is a much smaller bank and therefore, theoretically less likely to be saved by the government in the event of a liquidity crunch. But by targeting distribution at Asia, the bank was able to narrow the differential slightly.
Having set out with a $75 million, books closed two-and-a-half times oversubscribed, prompting the increase. A total of 37 accounts participated in the B3/CCC rated deal, with the largest order totaling $21 million.
By geography, the book split Indonesia 50%, Singapore 23%, Hong Kong 22% and Europe 5%. By investor type it split 50% bank, 42% private banks, 5% asset managers and 3% corporates.
Mandiri by contrast had slightly more participation outside Indonesia and a much higher concentration of asset managers. It placed 40% in Singapore, 33% Indonesia, 15% Europe and 12% elsewhere, but mainly Hong Kong. Asset managers took 38%, private banks 27%, insurance funds 14%, banks 14% and pension funds 7%.
Private banking investors were said to have taken a particularly positive view of BNI because the deal combines high brand awareness with an attractive coupon in a low interest rate environment. The latest 50bp US interest rate cut has prompted a number of research houses to argue that the rally in investment grade bonds is coming to end and advocate that investors switch into non-investment grade credits.
In pure spread terms, Asia's non investment grade credits have performed the most weakly over the past month and some analysts consequently believe these show the most upside at current levels. Mandiri's sub debt deal, for example, widened 46bp in the month to Friday.
BNI's sub debt deal will also increase the bank's CAR, which stood at a relatively low 14.2% at the end of March considering that a large portion of its asset base is composed of zero risk weighted government recapitalization bonds.
Some investors have nevertheless been surprised so see the bank accessing the sub debt markets at a time when it is still in default of an obligation to inject Rp150 billion ($16.3 million) into Singapore-based subsidiary BNI Multi Finance. BNI's excuse for the default has been that the transfer would have exceeded its legal lending limits, although as one investor points out these have not changed since the time the bank signed the initial restructuring.
However, as he acknowledges, "Creditors have not called a formal default and there are advanced talks on a new restructuring and buyback funded by BNI through the purchase of assets from BNI Multi Finance. Therefore it looks like it will probably be resolved amicably. Nonetheless I was surprised that they were attempting a new issue prior to this resolution."
