Merchants Bank eyes 30b yuan bond sale
China Merchants Bank plans to sell up to 30 billion yuan (HK$33.91 billion) of subordinated debt to domestic and overseas investors to replenish capital for its recent takeover of Wing Lung Bank.
The bonds, which still require shareholder approval, will come in maturities of five years or above and will be sold via the interbank bond market, according to a statement posted on the website of the official Shanghai Securities News.
It is the biggest bond sale for the Shenzhen-based lender, the country's sixth largest, and its first attempt to tap the Hong Kong bond market. The overseas tranche will not exceed 10 billion yuan, the statement said.
Analysts said the fund-raising would pave the way for the full takeover of family-run Wing Lung in the HK$19.3 billion deal. Merchants Bank announced early this month that it would buy 53.1 per cent of the bank from the Wu family, valuing it at about 2.91 times the net book value.
Upon shareholder and regulatory approval, Merchants Bank would be required to make a general offer for all issued Wing Lung shares, leading to a total cash consideration of 32.4 billion yuan for the entire bank.
While the mainland lender dismissed concerns that the takeover would hurt its profit, the all-cash transaction would reduce its liquidity upon completion in August.
'As we do not view sub-debt issuance as equity, [we think] the bond sale will not help restore the bank's core capital strength,' said Liao Qiang, an analyst from Standard and Poor's, which has put Merchants Bank on review for a credit-rating downgrade.
Other securities firms also take a less optimistic view.
HSBC said the acquisition via sub-debt financing would reduce the medium-term return on equity from 32 per cent to 29 per cent, reflecting lower returns and higher book value.
Merrill Lynch said the interest expenses would offset largely Wing Lung's contribution to Merchants Bank's earnings per share.
The steady strengthening of the yuan has spurred desire among mainland companies to issue bonds overseas. But domestic lenders may find it difficult to get regulatory approval.
'The case is similar to mainland companies listed in Hong Kong,' a fund manager said. 'It would take a long time for mainland lenders to convert the money raised in Hong Kong back into yuan.'
