Published June 24, 2009

Bank Negara blocks EON Capital's issue

Malaysia's No8 bank likely to issue RM200m bonds now instead of warrants

By S JAYASANKARAN
IN KUALA LUMPUR

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MALAYSIA'S central bank has blocked a warrant issue to a foreign shareholder of EON Capital.

The country's eighth-biggest lender said on Monday that Bank Negara had rejected the proposed warrant issue to its 20.2 per cent shareholder, Hong Kong-based investment firm Primus Pacific Partners. Bank Negara did not give any reason for the rejection.

Upon conversion to EON Capital shares, the warrants would have increased Primus's stake in the bank to 26 per cent and lowered its cost of entry. Primus had bought its stake in 2008 for RM9.55 a share and with the stock now trading at RM4.68, its paper loss comes to some RM5 a share.

BT reported previously that relations between Primus and Rin Kei Mei, a 15.5 per cent shareholder who effectively controls EON Capital through support of other shareholders, turned frosty after Primus did not subscribe to a RM655 million (S$269 million) of bond and warrants issue that it had agreed to underwrite. Among other things, the proceeds from the issue would have been used to redeem a US$225 million bond issued by EON Capital.

BT also reported that Bank Negara had insisted that the US bond be redeemed only after EON Capital received the proceeds from the bond-warrants issue. EON Capital redeemed the bond thinking the proceeds would materialise.

But they never did, which outraged Bank Negara as EON Capital's capital adequacy ratio (CAR) fell to 9 per cent after the redemption. That was within regulatory limits, but the regulator felt that it was not comfortable enough to cushion EON Capital against potential loan losses in a recession.

EON Capital scrambled to raise RM410 million in medium-term notes at an effective rate of 7.5 per cent, which lifted its CAR to a more comfortable 12 per cent. But its Tier-1 capital remained close to the required limit, and the whole episode incurred the wrath of founder-shareholder Mr Rin.

Primus subsequently proposed, among other things, a RM1 billion rights issue, but industry executives said that Mr Rin and his allies on EON Capital's board refused, insisting that Primus honour its original promise. That has since lapsed, so Primus suggested the new warrants issue - now rejected by Bank Negara.

According to executives, the rejection could illustrate Bank Negara's unhappiness with Primus, signalling a refusal to allow it to increase its stake in EON Capital to 26 per cent.

It could also complicate EON Capital's capital structure, raising concerns that the bank's fragmented shareholding profile is hindering decision making.

Executives say that the bank is now likely to issue a RM200 million bond to increase its capital adequacy as an interim measure, before a final capital-raising plan is submitted to Bank Negara for approval.

Most analysts agree that EON Capital needs to get its capital structure right, especially in the current climate of rising non-performing loans. In addition, it would help the bank's lending operations because liquidity is tight and EON Capital has a Tier-1 capital ratio of 9.35 per cent, as opposed to other Malaysian banks' more comfortable levels.

Even the bank's management structure has not been sorted out. It is currently run by a committee under acting chief executive Michael Lor Chee Leng, EON Capital's head of consumer financing.

Executives say that Bank Negara has suggested Michael Barrett, the outgoing managing director of RHB banking group, as a potential chief executive of EON Capital, but no decision had been made.