Krungthai Bank united two major South-East Asian markets in 2015 with the first Basel III capital issue from a foreign-owned bank in Malaysia’s domestic bond market.
The M$1bn (US$228m) 10-year non-call five Basel III compliant Tier 2 issue added new depth to the conservative Malaysian market, establishing the ringgit as an alternative source of capital for other regional lenders.
Malaysian investors are known for being highly selective, preferring high-rated instruments from names they know well. Only one cross-border capital-raising exercise had been completed previously, with a M$400m 5.6% Tier 2 issue from CIMB’s Thai subsidiary, but that deal piggy-backed on the parent company’s brand name and a successful outcome was a no-brainer.
However, the Thai bank was entirely new to Malaysian investors. The Thai government’s Financial Institutions Development Fund holds a 55% stake in the lender, which contributed to the AA2 rating from agency RAM for the subordinated notes, but investors were still wary of risks related to the military government.
Bank capital paper under the Basel III regime exposes investors to losses, and cross-border issues require investors to spend time understanding the regulatory regime in a market beyond their own borders. This is especially true for Krungthai Bank, where state ownership prevented it from offering equity under the loss-absorption trigger.
This means investors face a full writedown if the local regulators decide the bank is no longer viable. Investors, however, do have some protection in that the writedown is on a sequential basis, so Additional Tier 1 holders will absorb losses ahead of the T2 investors.
Sole lead CIMB and the issuer worked hard on the ground to educate investors during the roadshow, and that paid off after the issue garnered orders of M$1.2bn at guidance of 5.00%–5.20%. The issue size was doubled on the strong demand.
The deal’s timing on June 22 took advantage of low swap rates, which allowed the issuer to lock in cost-effective fixed-rate funding in Thai baht. The ringgit issue was priced to yield 5.1%, translating to low 4% post-swaps in baht terms, well below the 4.65% that Thanachart Bank paid for a Bt7bn (US$208m) Tier 2 trade done in May.
Against its outstanding US$700m 5.2% 10.5NC5.5 paper callable in 2019, Krungthai Bank was able to make substantial savings of up to 50bp.
The issue introduced Krungthai Bank to a new set of investors, achieving a key objective of the exercise. Orders were well distributed among fund managers, insurance companies, banks and private bank clients.
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