Southern Bank Berhad raised $200 million from a lower tier 2 deal yesterday (Wednesday), pricing a 10 non-call five offering at the mid point of its indicative range.
With Goldman Sachs as lead manager, the group priced its Baa3/BBB- rated deal at 99.028% on a coupon of 6.125% to yield 6.355%. This equated to 242.5bp over Treasuries, the mid point of a 240bp to 245bp range. On a Libor basis, the deal priced at 188bp over.
At this level, Southern Bank came about 5bp wide of Eon Bank on a like-for-like basis. Eon has a 5.375% $225 million deal due January 2014, trading yesterday at about 180bp over. The curve is worth about 4bp to 5bp.
Many initially thought Southern Bank might price slightly through Eon Bank given it has a one-notch higher sub debt rating of BBB- from Fitch compared to Eon Bank's BB+ rating. However, it is less surprising in the context of a market where all primary deals need a new issue premium and appetite for Malaysian sub debt has considerably weakened.
The disappointing secondary market performance of a $350 million lower tier 2 deal by Public Bank last week has impacted the whole Malaysian sub debt curve and many investors consequently stayed away from Southern Bank. Public Bank failed to hold up once it began trading despite its stellar credit standing with investors and a superficially strong order book that closed four times oversubscribed.
At its pricing last Tuesday, the deal came with an issue price of 99.716% and coupon of 5.625% to yield 160bp over Treasuries, or 103bp over Libor. One week later, it was trading 14bp wider at 117bp.
Eon Bank has similarly seen spreads widen from 165bp over Libor to 180bp during the same time period.
With trading accounts shying away from the new issue market, Goldman adopted a strategy of targeting buy-and-hold fund managers through an intensive credit sell. The result was one of the smallest order books on record for an international bond deal, but the lead will be hoping its tactics pay off and the deal holds steady during secondary market trading.
About 26 investors are said to have participated in a book that closed one-and-a-half times covered on a net basis. Allocations by investor type show that 51% went to fund managers, 14% to insurance companies, 31% to banks and 4% to retail.
By geography, Asia accounted for 70%, Europe 26% and Australia 4%.
Southern Bank was positioned as a strong niche player with a leading market position in the businesses it pushes. It is, for example, the second largest issuer of credit cards in Malaysia, the second largest asset manager and second largest unit trust manager. Its consumer and SME focus means it runs a higher net interest margin than the industry average - 3.1% at the end of 2003 compared to a 2.8% average.
Its main problem is a relatively high level of NPLs - 10.2% at the end of 2003 on a three-month past due basis. This ranks as the third highest among Malaysia's 10 anchor banks. But specialists say the bank was able to get investors comfortable with the ratio when they were told that 50% of the NPL's were within Southern Finance and 80% of these constituted legacy NPLs of two finance companies purchased after the financial crisis.
Prior to the new issue Southern Bank had a CAR of 11.58% of which tier one accounted for 8.58%. Pro forma for the new bond deal and a prospective Bumi share placement, the bank's CAR is set to soar to 17.17% or which tier one will account for 10.72%.
