On A Clear Day, I Can See Forever

My blog has mostly been about a lot of bashing and flaming, in particular when major institutions do not execute or plan well. A diversion for now, which I hope will be more frequent in the future, are two major developments worth noting:

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KUALA LUMPUR, Aug 11 — CME Group Inc, the world’s largest derivatives exchange, will develop a US dollar crude palm oil (CPO) futures contract using settlement prices of Malaysia’s ringgit contracts for trading on CME Globex. CME will work with stock exchange operator Bursa Malaysia to offer the cash-settled futures contract in the United States aimed at globalising the Malaysian CPO futures market, a statement from the two companies said.

The two parties will also explore trade matching services, product licensing and minor cross-equity investments in a partnership still subject to regulatory approval. The Chicago-based exchange operator said the proposed partnership will increase its presence in Asia and expand its transaction processing business opportunities. Specific terms of the partnership will be announced later, the two exchanges said in a statement. Bursa has introduced a dollar-based palm oil contract. — Reuters

Comments: The FUPO was a start and fizzled just as many had expected (including this blog), but looking further ahead, the instrument was needed as a negotiating point to get CME to launch a similar US-dollar based contract as well. Getting it on CME is no guarantee of success, but will be the best platform for getting things right. Volume and liquidity will need to start on CME side before getting similar activity on FUPO during Malaysian trading time. It has a decent chance for success now as being on CME would at least lure the arbitrageurs. The fact that there is a corresponding ringgit based contract makes for good arb opportunity. Volume begats volume, soon I hope to see FUPO trading just as active as the ringgit based contract. The major local palm oil players have a role to play (which they haven't been doing so far) - all have been sitting back pooh-poohing the FUPO and just putting through contracts through the ringgit side. You as the major CPO players have a big role to play, you have to lead, try funneling 25% of all hedging / selling activity through FUPO because in the end its you fuckers who will benefit. Having a USD contract for futures will negate a lot of currency hedging required as you people still borrow extensively in USD. You cannot just sit back and say to Bursa "let's see what you can do". You know very well you will be the major players in any CPO based contracts - unless you think this is not going to help shore up your business strategy and options (which means you are plainly stupid to think so when there is a government body helping you indirectly to better sell, better hedge and better market your product).

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KUALA LUMPUR, Aug 11 — Malaysia’s central bank has directed a sweeping overhaul in the board of directors of the country’s largest banking group Maybank, in an unprecedented government censure on a board of a financial institution. The little-publicised revamp followed government displeasure at the controversial acquisition of an Indonesian lender by Malayan Banking (Maybank) last year, officials say. Bank Internasional Indonesia (BII) was bought from a consortium led by Singapore’s Temasek Holdings at a price that was deemed too high.

Prime Minister Najib Razak, who directed Bank Negara to review the transaction, has endorsed the central bank’s decision calling for a Maybank board revamp, the government officials say.

“The decision was also made that the board revamp will be carried out in stages and directors who are retiring won’t be re-elected to the board,” said a senior government official who was involved in top-level discussions on Maybank’s Indonesian venture.

Maybank’s main shareholders are national equity fund Permodalan Nasional and pension fund Employees Provident Fund. Bank Negara declined comment for this article, citing its policy of not discussing issues involving individual financial institutions. Maybank executives, including its chief executive officer Abdul Wahid Omar, also declined repeated requests for comment for this article. But the bank did announce the retirement of two directors and the appointment of three new members mid-last month. Between end-October last year, when the acquisition of BII was completed, and this March, three directors have resigned.

“This is part of the reforms that the PM is pushing for and it will raise the sense of greater accountability in the boards of government-linked companies,” said a senior adviser to Najib who is familiar with the central bank’s decision on Maybank.

In March last year, Maybank entered into an agreement to buy a 55 per cent interest in BII from Sorak Financial Holdings, which is majority-owned by Singapore’s Temasek Holdings. The Malaysian bank agreed to pay US$1.5 billion (RM5.3 billion) for the stake and then make a tender offer for the remaining 44 per cent for roughly US$1.2 billion. But the global financial meltdown raised questions over the health of banks in general and reignited criticisms that Maybank was paying too high a price for BII. Maybank’s position was further undermined when Indonesia introduced changes to its corporate takeover rules, which called on the Malaysian financial institution to sell down 20 per cent of its holdings in BII within two years of its takeover.

Bankers close to Maybank had argued that the disposal was surely to lead to massive losses. Faced with the prospect that the deal could adversely hit Maybank and the Malaysian banking system, Bank Negara had revoked its approval for the BII acquisition. The approval was later reinstated. The deal was finalised after the Temasek-led consortium lowered the purchase price for the transaction by US$220.5 million for the 55 per cent interest in BII. In Bank Negara’s review, which was completed in April this year, it concluded that Maybank’s purchase price for BII was too expensive. The central bank also concluded that the Malaysian financial institution did not put in place adequate measures to protect itself in the event that the deal encountered problems, the government officials said. — The Straits Times

Views: The article is so succinct and clear, I don't really have to add anything. Interested readers can search this blog for my previous postings on Maybank and BII.


p/s photos: Lee Ji Ah

Maybank's Not-So-Right Rights Issue!

I can understand the left hand right hand rights issue by TMI, supported by Khazanah, following the big cash giveaway by Telekom Malaysia. That was a preconceived strategy when the company was split up. The Maybank rights issue is altogether different. As reported by Finance Asia with my comments in purple.

Finance Asia: Investors reacted negatively to the RM6 billion ($1.6 billion) rights issue announced by Malayan Banking, or Maybank, after the close on Friday

The renounceable rights issue had been well-flagged in the local media and on the wires, and thus the sell-off was most likely not due to the pending dilution, which could be as much as 45%. The Malaysian lender's earnings report for the six months to December 2008, which was also released on Friday, may however have sparked a realisation that its capital-raising exercise may not be quite as pre-emptive as for some of its Singapore peers, such as DBS.

Its capital ratios may look okay for now, but analysts take a cautious view in light of the difficult economic environment -- second finance minister Nor Mohamed Yacop said on Friday that the government isn't sure whether Malaysia will be able to escape a recession -- as well as Maybank's aggressive overseas expansion. (Duh! Only government departments and officials touted the "we may not be going into a recession, we might be able to avert it even"... if they bothered to check not-the mainstream media, its foregone conclusion months ago. People, its ok to go into recession, even the man on the street is ok with that, what we want to know is that our government is able to face up to it early, be transparent and candid about it, and then try to tackle it intelligently... on all counts, fail, fail, fail.. The citizens need not be lulled into a false sense of security, people are smarter nowadays, no thanks to main stream media and official pronouncements. Something is not right when many outside the government can read economic trends better!)

J.P. Morgan noted in a report that Maybank is facing a deteriorating economy and added that there is little likelihood of an "upside surprise in earnings". And Fiona Leong of AmResearch argued that "while its domestic operations remain healthy, the group's international operations are experiencing stress. Furthermore, its just-announced rights issue is highly dilutive and will cap share price performance." Both banks have a sell-equivalent recommendation on the stock.

However, Maybank itself referred to the proposed rights issue as a pre-emptive move to further optimise its capital structure and strengthen its balance sheet to enhance shareholder value. It will also "address market expectations for higher capital levels for financial institutions globally", the bank said. Bloomberg quoted representatives from the bank at a press conference on Friday as saying that the capital raised from the rights issue will be sufficient for the next three to five years and that Maybank doesn't see a need to raise more capital.

Following the rights issue, the bank's core capital ratio will increase to 11.01% from 8.13%, while its risk-weighted capital ratio will improve to 16.42% from 13.54%, based on the end-2008 results. Its gearing ratio will drop to 0.58 times from 0.77, based on the balance sheet for the fiscal year to June 2008 and adjusted for "certain material transactions". The money raised will be used for working capital and general banking purposes.

The bank, which is Malaysia's largest lender by assets, proposed to issue up to 2.212 billion rights shares on the basis of nine new shares for every 20 existing shares at a 30% to 40% discount to the theoretical ex-rights price. This is in line with DBS's $2.7 billion rights issue in January, which was offered at a 35% discount to the theoretical ex-rights price. The ongoing rights offers for Singapore developer CapitaLand and Indonesia's Bank Danamon are also offered at discounts of 35% and 34%, respectively, while CapitaMall Trust is offering its shares at a 28.7% discount to the theoretical ex-rights price.

The exact price of Maybank's offering will be determined at a later, yet to be specified, date, which will give the bank, and the arrangers, the flexibility to respond in case the market should take a sudden turn for the worse, or perhaps for the better.

Maybank's shareholders will need to approve the rights issue at an extraordinary general meeting, expected to be held in about three weeks, and representatives for the bank say they plan to complete the fund-raising by the end of April.

Existing shareholders representing 69.4% of its capital have agreed to take up their share of the offering. These include Employees Provident Fund, which holds 13.7%, Permodalan Nasional Berhad (PNB), which has a 5.9% stake, and Skim Amanah Saham Bumiputera (ASB), which is a unit of PNB and Maybank's largest shareholder with 45.6%. On top of that, PNB will apply for an excess allocation of up to 20%. (Obviously a smart move in anticipation of a possibility that the rights might be under subscribed. Getting PNB in for excess allocation is smart, so that the rights issue wouldn't turn into a fiasco).

According to Maybank, the remaining 10.6% will be underwritten by other parties, which haven't yet been determined. However, it is expected that Credit Suisse and Goldman Sachs, which are the international advisers for the rights issue, will play a role. Maybank-IB is a principal adviser for the issue.

Maybank reported a net profit of M$735 million for the second quarter of fiscal 2009, which ends on June 20 this year - a 28.4% improvement from the first quarter. The profit in the first half to December 2008 declined 10.9% from the same period a year earlier to M$1.3 billion, primarily due to a 27% increase in overhead expenses and a 77% surge in loan loss provisions to M$504 million.

AmResearch noted that the gross NPLs from Maybank's international operation more than doubled to M$927 million in December 2008 from M$406.5 million six months earlier. The bank also did not take any impairment charges for the second quarter of fiscal 2009 related to its recently acquired stakes in Bank Internasional Indonesia, MCB Bank in Pakistan and An Binh Commercial Bank in Vietnam following a M$242 million impairment loss for its 20% investment in MCB in the first quarter. (This is where the crux of the matter lies, Maybank bought and invested late into regional banks, at highish prices. The crisis has basically set Maybank up to need to write down substantially on their acquisitions. NOTE THAT NO IMPAIRMENT CHARGES WERE RECORDED for the latest quarter - hint, its coming over the next couple of quarters!!!).

The Maybank management expects to complete an impairment review for its acquisitions in BII and MCB by June 2009, and AmResearch's Leong says any potential impairment losses will drag earnings lower and dent the projected book value.

"Maybank paid an average of 4.3 times price-to-book for its 97.2% stake in BII and 5.2 times for the 20% equity interest in MCB. Our calculations suggest that should Maybank write down these investments to 3.5 times price-to-book, there would be an impairment charge of M$1.258 billion for BII and M$892 million for MCB. The total impairment charge of M$2.15 billion would be 80% of our revised core net profit of M$2,687 billion for fiscal 2009," she said.

Rights issues are without question the capital raising method of choice in Asia this year, with 29 deals worth a combined $2.5 billion completed so far, according to Dealogic, which doesn't include the portion of the rights offer taken up by the controlling shareholder in its calculations. This is the highest year-to-date volume in the region ever and follows a record year for rights offers in 2008 when $15.2 billion was raised from 155 deals.

Traditionally not that popular with major companies in Asia, rights issues have moved to the forefront as investors remain cautious about taking on new exposures, making it almost impossible for companies to raise equity through new share placements - especially in larger sizes above $1 billion.

Maybank's offering will run almost parallel to a rights offering by Malaysian mobile operator TM International, which last Thursday announced plans to raise M$5.25 billion ($1.4 billion) over the next couple of months. The TMI deal has strong support from its largest shareholder, Khazanah Nasional, which has committed to buy up to 65% of the deal, if necessary.

Final thoughts, sell first ask questions later. The rights will be an uphill exercise. If you still want to buy Maybank, look for when the rights are traded, they could be "very cheap". Even when you get the rights cheaply, remember you will have to tolerate a few quarters where there will be substantial writedowns on the regional banks' acquisitions.

p/s photo: Meisa Kuroki

Petaling Street Hawkers Calling You Back With Deeper Discount!

Maybank had been due to complete its purchase on Friday of a 55.5% stake in BII, for US$1.5 billion. Maybank stood to lose more than 400 million ringgit if it should walk away from the deal. The regulator "changed" the rules for the deal when it come to approving the deal. The changes alter the deal strategy significantly.

I DID NOT HEAR OF SELLERS THEN OFFERING TO renegotiate the deal, or return the deposit if Maybank wanted to walk away, they held onto the terms of the deal. Since then the share price of BII has fallen enormously. NOW THE SELLERS OFFERED to reduce the deal by 480 million ringgit. The rebate is more than the 400 million ringgit deposit Maybank stands to lose by walking away from the acquisition yesterday.

Moral of the story, how many idiots are running around in this deal? Why do the idiots think there are stupider idiots running around as well in this deal?

Bank Negara had previously blocked the acquisition after Indonesian regulators said Maybank would have to sell part of its stake in the future to comply with new rules designed to raise the shareholdings of Indonesian investors. The central bank then gave the deal the green light on September 16 after Indonesia's capital markets regulator agreed to extend the deadline for Maybank to cut its stake. In the latest move, it told Maybank that the terms needed to be revised – that is, the price reduced – because of turbulence in the global financial markets.

The concern of investors and also Bank Negara Malaysia (BNM) is that Maybank would end up losing a pile if it were to pare down its stake by 20% within two years. This is because it is acquiring the shares at Rp510 while it is less than Rps330 now.

Maybank said in a statement dated Sept. 25 the Malaysian central bank ordered it to reduce the price or scrap the transaction, sparking a dispute with Indonesian authorities and a record slump in Bank Internasional's share price. Temasek said Maybank first asked for a one-month extension and a price reduction on Sept. 24, which it turned down a day later. It was informed of the objections by Bank Negara, or the central bank, on Sept. 25 at 11:32 p.m. local time, it said.

Khazanah Nasional Bhd., Malaysia's sovereign wealth fund, is paying 2.5 times the book value of PT Bank Niaga and three times book for PT Bank Lippo as it buys the remaining shares of the two Indonesian banks in a proposed merger. Khazanah and its unit, like Temasek, are either selling one of the two banks they own or merging them to meet an Indonesian central bank deadline limiting ownership to just one local bank by 2010. (Maybank's purchase price for BII was 4.7 times book value, which was a lot more than the 1.98 times book value of Indonesia’s leading bank, Bank Mandiri, and of Maybank's own price-to-book multiple of 2.3 times.). Bank Internasional's shares traded at 310 rupiah yesterday, compared to the deal price of 510 rupiah.

''You can't do this,'' Achmad Fuad Rahmany, chairman of Indonesia's market regulator, said in an interview in Jakarta yesterday. Renegotiating the price ``will cause losses to investors.'' OH YES WE CAN, just like the way you enforced a "selling down clause" in your approval for the Maybank deal. That clause basically altered the strategic value behind the deal. The deal terms may be agreed upon, but always upon the deal being approved by the relevant authorities. Now the authorities have "materially changed" the strategic value of the deal. Maybank can walk away and lose their deposit. What do you mean "you can't do this", Encik Achmad???

When Maybank was faced with the embarrasing situation of losing the deposit for having to walk away - the sellers DID NOT offer a way out for Maybank, knowing full well that Bank Negara was making life hell for Maybank with the additional clause inserted by the Indonesian authorities. Maybank was getting slammed (correctly) for not tightening the deal terms (e.g. deal off if approval is not gotten from the Indonesian authorities, or if there are conditional "changes" to the deal when being approved by the Indonesian authorities).

Make no mistake, i am not siding with Maybank here - in fact the people responsible for the deal should sent back to school.

So to the buggering sellers offering the 480 million ringgit discount - go fly my wau! Too little too late.

Maybank, take your medicine and walk away, lose 400 million ringgit OK what... but surely SOME BLOODY heads must roll - who were the advisors, who were the legal advisors, who were the managers in charge of negotiating the deal???

Temasek and Kookmin, go find your Alan Bond scalp somewhere else!

... and its a celebratory Raya at Bank Negara after all...

p/s photo: Jamie Yeo