Prefer Existing Sub-debt of CIMB Thai 24c19 over the New 26c21

05 July 2016

Credit and Relative Value Idea

           

Prefer Existing Sub-debt of CIMB Thai 24c19 over the New 26c21

Highlights/Updates:

CIMB Thai printed MYR570m 10nc5 Basel 3-compliant sub-debt at 5.35%, which is 25bps lower than the similar issuance back in 2014. The new sub-debt coincides with the upcoming maturity of the existing THB3bn (equivalent to MYR340m) sub-debt on the 14-Jul, and would strengthen CIMB Thai’s pro-forma total capitalization ratio to an estimate of 15.9% (Mar-16: 15.0%) which improves the bank’s capability to withstand weakening asset quality outlook. Non-performing loans may deteriorate to c.4% in 2017, from 3.0% as at 1Q16, based on management guidance from a news report. As a whole, operation in Thailand accounts for about 11% of CIMB Bank’s loan portfolio. The sub-debt programme incorporates a loss absorption feature in the event of non-viability for both CIMB Thai and its holding company, CIMB Bank. Fundamentally, we view that CIMB Bank’s strong capitalization of 15.4% is sufficient to absorb the potential impairments from the credit cycle downturn (More financial highlights for CIMB Thai and CIMB Bank in Figure 3). 

Bond Details:

Bond	CIMB Thai 5.35% 7/26c21 (New) (Issued Price:100; YTC: 5.35%, MGS5+196bps)	CIMB Thai 5.60% 7/24c19 (MTM Price:101.20; MTM YTC: 5.17%, MGS3+201bps)
Amount Outstanding	MYR570m	MYR400m
ISIN	MYBPN1600096	MYBPN1400414
Ratings	RAM: AA3/Stable
Key Terms	·          Basel 3 Tier-2 (B3T2) ·          Write-off upon non-viability event (PONV). Partial write-off is allowed. ·          Write-off of B3T2 will only occur after all Tier 1 with loss absorption features are fully written-off or converted into equity. ·          PONV trigger event: (1) Insufficient assets to make repayment to its depositors and creditors, its capital funds having dropped to the extent that its depositors and creditors will be adversely affected, or not being able to increase capital by themselves. (2) BOT and/or other government agency decide to grant financial assistance/capital injections to the bank. (3) Non-viability event for CIMB Bank. ·          Coupon reset on first call date: Reference rate + Margin

Relative Value Commentary:

The new CIMB Thai sub-debt 7/26c21 (5.35%) is priced at a similar spread of c.MGS+196bps but 25bps lower on absolute term compared to the previous issuance in 2014 (5.60%). We view that the new sub-debt is fairly priced at 5.35%, on relative value perspective, which is only 18bps above the existing 7/24c19 sub-debt (from MTM of 5.17%) for 2 years longer tenure. Nevertheless, between the CIMB Thai’s sub-debt, we prefer the shorter tenure 7/24c19 sub-debt which offers higher risk reward of 62bps over AA1-rated CIMB Bank sub-debt 9/23c18 (MTM: 4.55%) although we acknowledge the additional yield is to accommodate for the illiquidity, lower rating by 2-notch and 10-month longer tenure of CIMB Thai’s sub-debt. Whereas, the new CIMB Thai 7/26c21 sub-debt merely provides an additional pickup of 37bps against CIMB Bank sub-debt 12/25c20 (MTM: 4.98%), despite it is fairly compensating for the 2-notches rating differences.