17/12/2008 - 14:10

Merrill blamed for CBA's $2bn confusion

17/12/2008 - 14:10


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Commonwealth Bank of Australia had terminated a share placement agreement with Merrill Lynch following confusion over its $2 billion capital raising launched last night.

Commonwealth Bank of Australia had terminated a share placement agreement with Merrill Lynch following confusion over its $2 billion capital raising launched last night.

The bank was forced to pull the pin on a $1.65 billion equity raising, part of the total $2 billion raising, and replace it with a cheaper deal after investors complained they had not been informed of changes to some of its guidance.

The bank ended its arrangement with Merrill, claiming the broker "did not inform potential investors of various disclosures made by the bank."

The new underwritten deal is being done at $26 a share and was still being finalised this afternoon, the Sydney-based bank said in a statement.

The price represents an 11 per cent discount to CBA's closing share price on Tuesday at $29.15.

The earlier $1.65 billion share sale was conducted by Merrill on Tuesday at $27 a piece after the market had closed.

CBA is also finalising arrangements for a $357 million raising through a previously announced placement at $28.37 per share to Merrill. This deal has not been affected by today's new deal.

The move comes after CBA said late on Tuesday it had completed a $2 billion capital raising in two parts of $1.65 billion and $357 million.

But confusion relating to an accompanying announcement referring to an increase in bad debt expenses for fiscal 2009 prompted complaints from investors, forcing CBA to pursue a revised placement for the $1.65 billion - with new arranger UBS.

While that confusion contributed to the lower share placement price, the discount was also required to get UBS to fully underwrite the deal, a market source familiar with the issue said.

In its statement on Tuesday, CBA said its full year loan impairment charges to gross loans and acceptances will be around 60 basis points, with the majority occurring in the first half of 2008/09.

The bank forecast last month that impairment expenses would be between 40 and 50 basis points.

Normally, investors would have been sent the new forecast together with the offer of the placement.

However, an apparent mix up between CBA and Merrill meant the announcement wasn't sent until after the placement was completed, resulting in investor complaints.

Analysts said the new forecast could translate to a reduction in full year earnings of around six per cent.

"It's not a big deal, and it wasn't unexpected, because most of the analyst forecasts were around that level anyway," the market source said.

CBA is raising money from shareholders to bolster its capital position in the face of a deteriorating world and domestic economy, in which the bank expects its exposure to bad debt to rise and credit conditions will worsen.

The bank plans to use the proceeds to redeem hybrid securities called PERLS.

CBA's Tier 1 capital ratio was expected to rise to about 8.5 per cent on December 31 following the raising.

That would bring the bank into line with its peers, according to Goldman Sachs JBWere analysts James Freeman, Ben Koo and Elizabeth Rogers.

The analysts have cut their profit forecast for CBA's 2008/09 earnings by six per cent.

"Whilst our full year bad debt charge was already around CBA's downgraded guidance, we have added additional cushioning given the increasing uncertainty around CBA's bad debt position," the analysts wrote in a note to clients.

The Goldman analysts rate CBA as a sell, because the bank's forecast price to earnings ratio of 9.9 times is a 14 per cent premium to its peer banks.


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