Emirates NBD, the nation's largest bank by assets, is offering investors the opportunity to swap existing bonds to shorter-term, more senior paper to help the bank bolster its balance sheet and meet capital requirements by the Central Bank. Emirates NBD needs to bolster its balance sheet, notably its Tier 1 capital, by the end of June to comply with the new requirements. The Central Bank demands that 11 per cent of a banks' assets are Tier 1 equity. This regulation, known as capital adequacy, measures financial strength.
"From this transaction, we can improve our Tier 1 capital position while investors are in higher-value securities," said Rick Pudner, the chief executive of Emirates NBD. The bank is taking advantage of the fact that its 10-year bonds are trading below par, or 100, which allows it to take profit and register the new, more senior debt in the higher, more valuable, Tier 1 category of capital. Late last month, Sanjay Uppal, the bank's chief financial officer, said Emirates NBD needed Dh3.5 billion (US$952.8 million) to reach the 11 per cent capital ratio. At the end of December its ratio stood at 9.4 per cent. Most UAE banks have better ratios, averaging about 13 per cent.
Investors who hold the existing 10-year bonds, which are part of the Tier 2 grouping, can swap that debt into three-year notes to mature in 2012. The original paper was issued by Emirates Bank International, which has since merged with National Bank of Dubai to form Emirates NBD. The bonds are trading below par, or face value, because interest rates were lower when the paper was issued in 2006. As a result, investors buying the bonds now will seek a discount to the prices of newly issued paper, which is offering higher interest.
Mr Pudner said the bank was exchanging the bonds because of the "price advantage". While the new bonds will mature in 2012, Emirates NBD can redeem them as early as 2011. Investors can exchange as much as $700m of the original issue of $1bn, but must do so by April 23. Banks have been forced to offer investors and creditors higher deposit rates as they struggle to secure enough cash to do business. Institutions in the Emirates have been particularly affected as international lenders pulled out their funds at the onset of the financial crisis last year.
Emirates NBD is taking advantage of investors seeking higher quality and safer debt and equity products. The new bonds will be more senior, which means investors are more likely to get their money back in the unlikely case of a bank default. "Investors at the moment have much less appetite for lower, Tier 2 bonds, which we issued in 2006," Mr Pudner said. The move mirrors tactics of banks such as Lloyds Banking Group, UBS and Royal Bank of Scotland, which have made similar offers to bolster their balance sheets following massive write-downs and losses due to the financial crisis.
Last month, Emirates NBD converted Dh12.6bn of deposits it received as liquidity support from the Federal Government into Tier 2 capital. Tier 1 capital includes common stock, retained earnings and perpetual preferred stock, while the less-senior Tier 2 capital includes items such as undisclosed reserves, general loss reserves and subordinated debt. uharnischfeger@thenational.ae
