DBS Thai Danu Bank PLC (Danu), one of ThailandÆs smallest lenders, has completed a Bt13.5 billion ($343 million) rights issue that will go towards offsetting its bad loan book. Most of the new funds came from its parent, Development Bank of Singapore (DBS), Singapore's biggest banking group.

Danu offered 1.1 billion new shares to its existing shareholders on 25 May. Shareholders received one new share and one warrant for each share they owned. Danu has also made a private placement of another 250 million new shares with attached warrants to local fund managers. Both these equity offerings were priced at Bt10 per share, higher than the Bt7.8 trading price at the time. It also proposed a total of 135,000 preference shares and 135,000 subordinated convertible debentures, to be offered solely to DBS.

DanuÆs capital-raising exercise was partly successful. Of the 1.1 billion new shares on offer, 410 million shares (or 37% per cent) were taken up, according to a company release to the stock exchange of Thailand on 30 June. Institutional investors took up 190 million shares (or 75%) of the new shares and warrants offered from the private placement. Of the preference shares and debentures, only 75,000 of each offering were taken up, the statement said.

Despite the partial take-up, Danu met its goal of raising Bt13.5 billion in new funds. Bt11 billion came from existing shareholders, Bt1.6 billion from the placement, and 7.5 billion from DBSÆ take-up of the preference shares and debentures. While DBS did not take up its full allotment of common shares, its stake in the Thai lender rose from 52% to 78% after it took up all the preference shares, debentures and a majority of new shares.

ôDBS was committed to its 52% from the very outset. It also agreed to pick up any available warrants and the rest of the private placement. Because of market conditions, we ended up taking a little more than expected,ö says Charles Newton, spokesman for DBS in Singapore.

Surprisingly, there have been few comments about the level of minority support for the issue. ôHalf of DanuÆs minority shareholders took up their options, which is a measure of their support from the bank,ö says Newton.

A new strain of hybrid capital

DanuÆs rights issue is interesting because it incorporates a new form of hybrid capital that has been sanctioned by regulators but hasnÆt been used so far. The preference shares and debentures are all considered part of a bond issue by the companyÆs accountants. Thailand's bank regulator allows these preference shares to be counted as tier-1 capital, or 'capital securities', in compliance with Bank of International Settlement standards. Thai regulators, analysts say, have been acutely aware that local banks would have a hard time raising all the funds they needed solely through the equity market.

Capital securities are similar to ordinary shares. They offer comparable rates of return. If in any fiscal year, Danu does not have profits and canÆt pay dividends, Danu will not pay a dividend on capital securities either. The preference shares and debentures are also long-term in nature, cannot be redeemed, and can only be converted to ordinary shares at Bt10. With these characteristics, such capital securities are referred to as a perpetual bond, analysts say.

And because DBS puts up all the funds, the bank ôhas no burden to raise funds to redeem the capitalö, said Danu president Pornasong Tuchinda in a statement. If, for example, Danu's ratio of tier-1 capital funds-to-risk assets falls below 4%, or the bank is dissolved, mandatory conversion takes place. But that is very unlikely to happen given DBS' influence.

NPL sales are coming next

With the new funds, DanuÆs capital ratio will raise to 15%, way in excess of minimum capital requirements. The bank is now moving ahead with plans to clear out its non-performing loans (NPLs), which make up roughly 40% or Bt40 billion of its loans. Danu plans to sell these NPLs off to third parties.

ôItÆs the first bank to do what investors have been demanding all along, getting rid of its bad loans entirely,ö says Andrew Stotz, analyst at SG Securities in Bangkok. ôOnce it gets past the legal minefield, it will be a lot easier for other banks to follow.ö

Danu is considering both foreign and local third parties. It is taking the auction route, unlike other banks, which are planning to transfer the majority of their bad loans to asset management companies by end-2000.

But auctions are fraught with difficulty, analysts say. Many of the NPLs being considered for the auction block are under litigation. The ideal solution would be for the ownership of NPLs to change hands without the litigation being dropped, analysts say. Thai authorities are supportive and are pushing for amendments to Thai laws so NPL sales can take place. But that would set so many precedents in so many different areas, it may be a while before the Danu auction can go ahead.