Siam Commercial Bank
by Professor Ian H. Giddy
|Siam Commercial Bank Braves The Elements|
Sometimes you just need a bit of luck. Sure, hard work, ample preparation and creative thinking can help you change your fortunes for the better, but a good roll of the dice can play a part in the best of deals. Ask Jada Wattanasiritham, Siam Commercial Bank's new president and CEO, what made the difference on the recent Bt65 billion ($1.75 billion) recapitalisation and she mentions the deal's structure and the bank's better story before admitting "we were just plain lucky". Just as SCB's juggernaut deal came to the market, a window of opportunity opened up and allowed it to thunder through.
The bank didn't feel lucky back in December 1997. Back then, its board members should have been congratulating themselves on the completion of a Bt10 billion rights issue and private placement. Instead, they were already becoming aware that Bt10 billion would not be enough to plug the growing hole in their balance sheet and that they had moved too early to raise capital. Notes Jada:
At that stage, the newly appointed lead managers could have been forgiven for wondering what they had got themselves into. As Scott Ferguson, head of equity capital markets at Salomon Smith Barney in Hong Kong, recalls:
They could attempt a straight equity issue (that would have been suicidal in the aftermath of the poor performance of the TFB and Bangkok Bank issues). They could try and buy time with some form of quasi-equity issue (they probably wouldn't raise enough and the cost would be prohibitive). Or, they could take part in the government programme and accept the diluting effect on the existing ordinary shareholders. Post-August, that started to look like the best choice.
SCB knew it would have to provide a viable business plan, review its credit process, provide accurate data on its non-performing loans (NPLs) and enhance its management. Consultants were called in. Deloitte Consulting reviewed the loan management process. Deloitte Auditing worked on the monthly loan ageing schedules and Cushman & Wakefield came in and made two studies of the real estate collateral underlying the loan portfolio.
While the consultants were beetling away, the bank's advisers were working out how to turn the theory of the government programme into practice. Ferguson today says the programme is brilliant in concept as it recapitalises the banking system at a low cost, but he concedes that its application caused headaches. The shareholding limit on non-Thai investors and the warrant component of the offer proved most troublesome. Says Ferguson:
At that stage, the pace began to pick up. Discussions with institutions on Thai roadshows in April and September 1998 had convinced Salomon Smith Barney that investors would need to see certain concrete steps before they would support SCB.
Among the changes that they would look for were enhancements to the board. Chumpol recalls that there were recurrent and lengthy discussions about the need to make changes and whether they would benefit the bank.
Making changes at board level was not the only difficult task facing Chumpol, there was also continuing pressure to consider a quasi-equity issue. Reports Chumpol:
Adds Jada: "It would have impaired the equity base of the bank for quite a while."
The government's 14 August programme stated that the Ministry of Finance would help banks to become recapitalised by matching the provision of preference share capital from private investors. Those preference shares would rank ahead of and substantially dilute existing ordinary shareholders, and would later be offered for sale to the private investors who had invested. The purchases of preference shares came with a warrant giving investors the right to buy the ministry's holding at a slight premium at any point over three years.
SCB needed Bt65 billion. The Ministry of Finance would subscribe for half that amount, so long as it was confident that the bank could capture the rest. The ministry's nerves were settled by the participation of an anchor investor, the Crown Property Bureau (CPB).
SCB is known as the 'King's bank'. The CPB has historically been the bank's largest shareholder. The King and the Royal Privy Purse also hold stock directly. The CPB committed itself to take Bt7.5 billion of the deal (Bt2 billion of which it held to offer to the retail shareholders that were unable to participate directly in the deal because of its structure). Salomon Smith Barney needed to find buyers for Bt25 billion of preferred shares and warrants.
Their marketing effort had started in 1998. Don Hartman, James Mitchell and Steve Taran - the Thai bank, Thai equity and sovereign research analysts, respectively - had been on global roadshows twice that year. They went out again in March and told the SCB story. They talked of the bank's early and impressive investments in technology, its outstanding franchise, its relatively low NPLs and its restructuring and cost- reduction programmes. They also spoke of the bank's improved levels of transparency and disclosure.
Investors witnessed that for themselves when the company went out on its own roadshow in early April. Management took with them a 275-page prospectus, which provided a breadth and depth of information previously unseen in an Asian issue. Reports Salomon's Ferguson:
The 25-slide presentation opened with five slides that listed all the things the bank had done wrong. Then it touched on how things were changing for the better. The effect was immediate. SCB's share price - local and foreign - began to climb and kept on rising, with the enthusiasm spilling over onto other securities. Notes Ferguson:
Among the existing shareholders was Japan's Sanwa Bank. Although it been a partner for 30 years, Sanwa had typically only held a 1% share. Its stake had risen to 13% following the private placement of late 1997. (Sanwa's holding was only supposed to climb to around 10%, but the US dollar amount of the placement having been agreed, the baht collapsed further giving them a larger share). Alongside the CPB, Sanwa Bank also took part in the recent recapitalisation, though its shareholding would fall to 9%.
By the time the roadshow and book-build process came to an end in late April, the international portion of the total Bt65 billion recap was more than 10 times over-subscribed. Sadly, as Ferguson notes, there was "nowhere to go with that excess demand". But, as Kirsty Mactaggart, syndicate manager at Salomon Smith Barney in Hong Kong points out, it allowed the bank to allocate to the best accounts. Roughly 85% went to what Salomon Smith Barney deemed Tier 1 accounts. Those accounts, reports Mactaggart, "accounted for 75-80% of demand". A large number of accounts were disappointed.
All that would be affected by the price was the number of shares that would be offered and, therefore, the precise level of dilution. As Chumpol notes:
The new management team made the tough decision to recapitalise the bank properly to get a better quality and quantity of capital. It addressed the NPL problem, improved credit management, reduced costs, enhanced disclosure and changed the board. When you do those sorts of things, it is little wonder that your luck can change for the better.