The climate for rights issues from banks is turning bleak, just when they need them most. That adds a little extra shine to the successful outing by Banco Comercial Português (Millennium BCP), which pulled off Portugal’s biggest ever rights issue in April.
Millennium BCP, Portugal’s largest private-sector bank, has had an even bumpier ride than most in recent times and, by the end of last year, it realised that its core Tier 1 capital needed replenishing.
There were a number of contributing factors. One was poor performance in capital markets. This reduced the value of the assets in its defined benefit pension fund, leaving a shortfall against liabilities of €140m ($217m). Then there was Millennium BCP’s stake in another Portuguese bank, BPI, the legacy of a failed bid in 2006. That too was substantially down in value and although not regularly marked to market – it is for sale – the board recognised an impairment and took a €80m pre-tax charge.
There were various negative regulatory impacts, as the Socialist Party government continued to tighten the screw on Portugal’s financial institutions. It imposed a new legal cap of 50 basis points on the amount that lenders can charge customers who want to pre-pay their mortgages. Fees have effectively been slashed in half, or worse. “We have a large mortgage portfolio, and this had had a significant impact on fees,” says Filipe Abecasis, head of Millennium BCP’s corporate centre.
Rounding up spreads
Other legislation has all but disallowed the rounding up of interest rate spreads. Common practice was to round up to the nearest one-eighth of a point. Under the new law, the maximum allowed is one-thousandth of a point. Portuguese banks also used to enjoy one day’s free float on funds credited to customer accounts. Now, the value date must be the same day. There has also been continuing compression of the interchange fees levied on merchants in credit card transaction. All in all, the regulatory impact on the profit and loss account was €65m.
The authorities have been investigating alleged irregular loans and stock purchases involving offshore vehicles between 1999 and 2002. The investigation precipitated the departure of the previous management at the end of 2007.
“We were strongly advised by the regulator to take a net charge of €220m to cover possible reassessment of loan exposures,” Mr Abecasis says. “The board decided to take a €230m net charge to the capital base at year-end.”
So, if 2007 was a memorable year for Millennium BCP, it was for all the wrong reasons. Put it all together and the core Tier 1 capital ratio was down to 4.3%. The new management decided to restore it to above 6%, which it considered adequate for a retail bank with a low risk profile.
“Among the alternatives considered was the sale of non-core assets,” says Mr Abecasis. “But given the situation in the markets, it was thought wiser and in the best interests of shareholders not to sell under pressure, which could be used to the benefit of any potential buyers.”
And so, in February, the decision was taken to launch a rights issue. The shares were trading at €1.89 when the announcement was made. After a fast-track beauty parade, Merrill Lynch and Morgan Stanley were selected as joint global co-ordinators and bookrunners, and work began on the prospectus. They provided standby underwriting, backstopping the issue at €1. Portuguese shares may not be issued at below par value – €1, in Millennium BCP’s case.
Positive market reception
“We were somewhat anxious about how the market would receive the issue,” Mr Abecasis says. “A lot had happened in recent months. But the market reception was surprisingly positive.” In fact, the core business had remained very profitable and investors could see that through the short-term noise. That ultimately drove the transaction’s success.
Nonetheless, it was an anxious couple of months while the prospectus was drawn up and approved, and the fully underwritten $1.3bn rights issue could finally go ahead. The price was set at €1.20, a discount of 37.1% to the theoretical ex-rights price, and the ratio was approximately three shares for every 10.
“The price was a contributory factor to the high liquidity in the rights market, which made for a fair trading price,” Mr Abecasis says. “In our last rights issue, in 2003, the rights traded at a 6% to 8% discount to the fair price. This time it was a 1% discount.”
Another quirk in the Portuguese system is that shareholders have the right to buy any additional shares not taken up by other shareholders – in other words, they can make overapplications. In this case, the shares were 1.8 times oversubscribed, which comfortably allowed a 100% take-up. Many other banks will look back on it with envy.
