In a move, which will surprise almost no one, Merrill Lynch and Merrill Lynch Phatra have been officially awarded the mandate to privatize Krung Thai Bank (KTB). Right from the outset, the US investment bank has been regarded as a shoe-in for the deal since Viroj Nualkhkair the honoury chairman of its Thai operations is also President of the government-owned bank.
The divestment will see government ownership drop to 49% and is scheduled to take place in November, with completion in either one or two stages depending on market conditions. The government currently owns 91.77% of KTB through an 87.23% stake held by the Financial Institutions Development Fund (FIDF), 3.75% stake held by the Ministry of Finance and 0.79% stake held by the Government Housing Bank.
Local observers say the entire stake will be sold through the public equity markets and if it is sold in one shot, the majority will be placed overseas. Based on a 43% divestment and share price of Bt10.8 (Tuesday's close), the government will net proceeds around the Bt46.2 billion ($1.13 billion) mark.
The deal is regarded as one of the most challenging equity mandates of the last few years, despite the strong performance of the Thai equity market so far this year and a huge increase in liquidity, which has seen average daily trading volume triple to $216 million a day. At $1.2 billion, the sell-down is almost double size of the previous record holder (PTT's $726 million IPO of November 2001) and quadruple the size of the one before that (its own $269 million IPO in the early 1990's).
At issue are three major hurdles. Firstly there is the sector and the fact that since the Asian financial crisis, international investors have lost money on all three of the huge bank re-capitalizations for Bangkok Bank, Siam Commercial Bank and Thai Farmers Bank.
KTB ranks as Thailand's second largest bank by assets and is primarily a policy bank whose lending is often state-directed and is, therefore, in the eyes of investors, liable to be misapplied. However, as a result of the post crisis transfer of Bt537 billion ($13.14 billion) NPLs to the FIDF, it has one of the sector's lowest NPL ratios. It also hopes to bring the figure down to 2% at year-end following the transfer of a further Bt47 billion to the Thai Asset Management Company.
The FIDF, however, lies at the heart of the second major hurdle. In return for transferring the NPL's in 1998, the FIDF was granted 10.8 billion 10-year warrants convertible on a one-for-one basis at a strike price of Bt10 per share. Given that KTB's ordinary share capital stands at 11.19 billion, the warrants are equivalent to 45% of its equity on a fully diluted basis and the threat of their exercise has hung over KTBÆs share price ever since.
In addition to this, the bank has Bt80 billion ($1.96 billion) of accumulated losses on its books, which it estimates will take five-years to clear without a capital re-structuring. Viroj has consistently said that a capital reduction is the best way to eliminate the losses and believes the bank has room to reduce its CAR by a third in order to do so.
At the end of the first quarter, the bank is said to have had a total CAR of 16.1% of which tier 1 equity accounted for 14.7%. Following the capital reduction, Viroj has also previously said the bank will raise tier 2 debt to bring its overall ratio back to the 15% mark again.
A second alternative would be to use surplus capital to deal with the warrants overhang by initiating buy-backs. As of March 2002, KTB had Bt111.8 billion ($2.74 billion) in paid up share capital.
Observers also say that a third alternative would be to structure the share divestment with warrants attached. This would enable the FIDF to realise some of the capital it has injected into the bank while systematically reducing the dilutive threat of its huge holdings.
At the end of the first quarter, the bank reported net income of Bt2.5 billion ($61.1 million), an increase of 14% over the same period the previous year. At the end of March, the bank had also increased its loan portfolio by Bt34 billion ($832 million) to Bt734 billion ($17.9 billion). Over the course of the entire year, the bank has targeted an ambitious Bt170 billion ($4.16 billion) increase in lending, of which Bt100 billion is being lent to government-related projects and Bt70 billion will be split between corporate and retail.
