EON Capital Bhd

The shareholder dispute in EON Capital Bhd over a proposed fund-raising exercise appears to have receded following a proposal for its single largest shareholder, Primus Pacific Partners, to subscribe for a warrants issue amounting to RM29.5 million.

The proceeds from the warrants issue would effectively lower EON Bank Bhd’s cost of funds incurred when it raised a RM410 million subordinated debt at 5.75% to beef up its capital in January 2009. The fund-raising exercise was part of the bank’s RM2 billion medium-term note (MTN) programme to raise capital that was also announced in January 2009.

The exercise was necessary as EON Bank’s management had redeemed US dollar papers amounting to US$225 million (RM783 million) in January 2009. This caused EON Bank’s risk-weighted capital ratio to drop close to 9%, triggering the concern of Bank Negara Malaysia (BNM).
EON Cap’s fund-raising proposal had included a rights issue which did not go down well with certain shareholders, in particular Rin Kin Mei, who is its third largest stakeholder with some 15.5%. These shareholders were said to be unhappy with the cost EON Bank incurred in its January 2009 fund-raising where it effectively

It netted RM380.5 million from a RM410 million bond issue, a shortfall of RM29.5 million. Because of the shortfall, the bank’s effective cost of funds was more than 5.75%.

Some shareholders were also not happy that an earlier fund-raising exercise approved by BNM August 2008 was not implemented. Under the earlier fund-raising exercise, EON Cap was to issue RM655 million in ringgit-denominated unsecured bonds with warrants to Primus. The proceeds from the subscription of the warrants by Primus and their conversion would beef up EON Bank’s capital. But the exercise was delayed as Primus was waiting for a Deutsche Bank report on various options to raise EON Bank’s capital requirement.

Deutsche Bank was appointed by the EON Bank management and proposed several options, including a rights issue. The cash call did not go down well with Rin who is said to have the support of other shareholders. Rin is also said to have pressed for the warrants issue to Primus.

In the latest proposal, with Primus subscribing for the warrants, it would effectively reduce EON Bank’s financing costs for the RM410 million sub-debt issue. At the same time, it would enable the bank to raise the targeted amount of funds without a rights issue.
By undertaking the proposed new warrants issue, the pricing of which represents the difference between the face value of the RM410 million MTN and the gross proceeds raised of RM380.5 million, the effective cost of funds for the RM410 million MTN raised by EON Bank can be effectively lowered to the coupon rate of 5.75% per annum.

Primus, which has a 20.2% stake in EON Cap, would take up 58.71 million warrants at 50.24 sen apiece. The five-year warrants can be converted to EON Cap shares from the issuance date until Jan 15, 2014 at an exercise price of RM6 per share.

The proceeds from the issuance would be used as working capital and to repay borrowings.
Barring unforeseen circumstances, the proposed warrants issuance would be completed by Dec 31, 2009. The banking group needs to get shareholder approval.

The 58.71 million new warrants to be issued to Primus is part of a proposed issuance of up to 93.8 million warrants to the Hong Kong-based fund. The entire 93.8 million warrants were to be issued with up to RM655 million 10-year non-callable, five-year subordinated bonds by EON Bank to Primus. However, these warrants had not been issued to Primus.

The total number of warrants to be issued to Primus would not exceed 93.8 million. Hence, in the event the entire 58.71 million warrants were issued to Primus, the bank would only issue 35.08 million warrants under the RM655 million ringgit papers issued to the bank’s largest shareholder.