Case study

 Siam Commercial Bank

by Professor Ian H. Giddy
New York University

Siam Commercial Bank Braves The Elements
5 Aug 1999
Siam commercial bank's bravery in admitting previous flaws helped capture investors' interest. The success of its bt 65 billion recapitalisation is evidence of what the right advice and corporate commitment can achieve.
Honesty proved the best policy when SCB set out its ambitious Bt65 billion recapitalisation plans. The bank's bravery in admitting previous flaws while outlining its transformation helped capture investors' interest. The deal's success is evidence of what the right advice and corporate commitment can achieve. Will Goodhart reports.

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:

    "We thought that was a lot of money, because our equity capital base at the time was only roughly Bt35 billion."
It was not enough. Another, greater capital-raising exercise was required. By the time that SCB was ready to go ahead again, Thai Farmers Bank and Bangkok Bank were already upon the market. And, just as Salomon Smith Barney, Lehman Brothers and National Securities were mandated to lead an offer in May 1998, the window of opportunity for Thai bank issuers slammed shut.

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:

    "It was not clear what the real capital requirement was. There was no clearly defined government recapitalisation programme in place and there was limited demand for Asian equity."
Slowly, the picture became clearer. A key development was the joint statement by the Ministry of Finance and the Bank of Thailand on 14 August, 1998. The announcement of the Tier 1 Capital Support Programme allowed the bank and its advisers to focus on SCB's options. They weren't extensive.

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:

    "We had something that could not be called a warrant, that could not be exercised other than quarterly and could not be exercised by the people we were selling them to."
Adds Chumpol NaLamlieng, executive chairman of SCB and credited as the driving force behind the restructuring and recapitalisation:
    "Administratively, it was pretty much of a nightmare, but in the end the actual scheme was really quite simple. Whoever follows us will find it quite simple, provided they don't ask for variations."
The amount of work that had to be done to design a deal that would meet the Ministry of Finance guidelines, be acceptable to SCB's existing shareholders and meet the bank's needs was immense. It soon became apparent that having three advisers working on the deal did little to enhance the process. It was hard to get everyone in the same place at the same time and even harder to reach agreement.
    "Eventually, we asked each of the banks how they really felt," says Jada.
    "And the board of directors asked each party to present their case as to how they should go ahead and under what timeframe."
From early 1999, Salomon Smith Barney went ahead alone.

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.

    "That was a very difficult decision because, in some sense, the management of every bank was a victim of the economic crisis, and especially since the bank was still in relatively good shape," he says.
    "In the end, the previous president, Dr Olarn, himself realised that his resignation would make the bank more attractive and would show investors that we were committed to change."
Jada, a 20-year SCB staffer, took over the role.

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:

    "It was not easy because we must recall that the market conditions were unfavourable for quite a long time, and the bank did have a time limit in that they did need the capital. There were discussions within the bank about whether we should do a temporary SLIPS or a CAP [the instruments employed by Thai Farmers bank and Bangkok Bank, respectively].
    I suggested that we should try and hold it off because it would prejudice any attempt to raise funds later. We felt that it was a last resort measure because it is an expensive - very expensive - form of capital and, furthermore, it is temporary. You basically pay a very high price for Tier 1 capital for five years."

    Adds Jada: "It would have impaired the equity base of the bank for quite a while."

For Chumpol and Jada a better, more permanent solution was to raise share capital.

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).

Blue-blood bank

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:

    "We went and looked back at US bank holding company offers - those that were US SEC Grade 3 compliant. We also went back and looked at a lot of the prospectuses for the recaps of US banks, like Mellon and Citibank. We looked at the level of disclosure they achieved and committed ourselves to exceeding that - which SCB did."
The 200 investors at the 12 group meetings and at the 99 one-on-one meetings held during the three-continent roadshow appreciated those efforts. They also welcomed the tone of the SCB management's approach. As far as SCB was concerned, honesty was the best policy.

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:

    "When institutions started buying the story, they bought the convertible bonds, the sub debt - you name it, they bought it."
The rapid increase in the bank's value eased the pain for the existing shareholders, who were facing the hard choice of a dramatic dilution or a further major investment. The number of outstanding shares in the bank, after all, was to rise from 588 million to 2.9 billion.

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.

    "There were a lot of zeros. We told people that allocation was going to be problematic from an early stage and it was complex," says Mactaggart.
The roadshow had started without an indicated price range, but was ultimately fixed at Bt26. For that price, the Ministry of Finance received a preferred share while investors received a preferred share and a warrant allowing them to purchase the ministry's share at a 13.3% premium (equivalent to the cost of carry) during a three-year period. The preferred shares carry a 5.25% dividend and full voting rights.

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:

    "That the capital would be adequate and that the bank would not have to come back and raise funds again was a prime concern. But, after investors were convinced that the amount was sufficient, then their attention switched around to the price."
That was hard to fix. Explains Chumpol:
    "There was no price reference for the preferred shares or for the covered warrants, which must have significant value. Frankly, the reasoning was very difficult to come up with. At the time we came up with the price, the market price for the stock was Bt18-19. The preferred shares should have some premium and the covered warrants should have some value. It was kind of a stab in the dark."
SCB's recapitalisation marked the successful end of a long, complex and difficult process. It validated the Ministry of Finance and Bank of Thailand's bank recapitalisation scheme, justified the bank's extensive restructuring and cost reduction programmes, and was reward for Salomon Smith Barney's persistence. SCB got what it wanted - a one-time, full recapitalisation - because its deal was well-conceived, well-structured and well-marketed.

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.

    Originally published in asiamoney | | | | contact
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