The Commonwealth bank’s shares face a major pounding later today when they are re-listed after the stuff up involving a $2 billion fund raising that was done by Tuesday night, undone yesterday morning, and then finally put away last night.
The unprecedented debacle has left the bank and its management looking foolish and incompetent as the issue finally had to be done by a second manager, at a lower price.
And it looks like lawyers at close range between the CBA and Merrills over the debacle.
UBS arranged the $1.65 billion of new shares to institutions at $26 apiece, a 10.8% discount to the last traded price of $29.15.
The CBA had been forced to pull a $2 billion offering (in total) at $27 a share it announced Tuesday night after Merrill Lynch walked away after the bank had said bad debts would be higher than previously forecast.
It was this paragraph in that Tuesday night statement that upset Merrills and other investors:
"Volume and revenue growth in both lending and deposits has remained strong over the two months since the September quarterly update. However, the Group expects credit conditions to continue to deteriorate and the full year loan impairment expense to gross loans and acceptances is now expected to be around sixty basis points, with the majority in the first half."
Merrills have reportedly claimed they weren’t told of the higher bad debts before the deal was done. Other investors reportedly have confirmed they weren’t told either.
At one stage yesterday it looked as though the deal wouldn’t go through.
The CBA raised $1,643m in the institutional placement priced at $27.00; and $357m under the previously announced $750m placement at a price of $28.37. (That was with Merrill Lynch last week).
The Commonwealth terminated the placement agreement because Merrill didn’t inform investors of various disclosures made yesterday,
the bank said in a statement yesterday.
"The Commonwealth Bank confirmed that it had terminated the previous placement arrangements made with Merrill Lynch International Australia Limited.
"It also confirmed the termination of the remainder of the VWAP placement as previously announced.
"Proceeds from the raising will be used to redeem the PERLS II securities, strengthen the Group’s balance sheet and allow the Group to take advantage of organic growth opportunities arising in the current market. In addition, this will allow the Group to maintain its strong capital position throughout the current economic slowdown and deteriorating credit conditions."
The bank raised $1.65 billion through a placement at $26.00 underwritten by UBS; and the $357 million raised under the VWAP placement at $28.37 per share (which had already been raised by Merrills).
The Tuesday statement on bad debts when the bank said it expects bad debts to rise to 0.6% of total loans compares with a November. 13 forecast of as much as 0.5%.
As result brokers like Goldman Sachs JBWere reached for the downgrade button and activated it.
The firm told clients yesterday:
Goldman Sachs JBWere said today there was "Bad debt driven guidance downgrade: CBA increased guidance for FY09 impairment charge to 60bp, versus previous guidance of 40-50bp and GSJBW revised forecast of 65bp of average gross loans.
“The "majority" of the bad debt charge is expected to be seen in 1H09. This relates to previously announced large single name exposures."
"We have downgraded earnings Per Share by -5.9% FY09, -3.0% FY10. Whilst our FY09 bad debt charge was previously in line with CBA’s downgraded guidance, we have added additional cushioning given the increasing uncertainty around CBA’s bad debt position (i.e. 2nd bad debt driven downgrade in 5 weeks)."
That is what the market will not be focusing on until the bank reports its interim result next February
