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MMI loan sparks debate on banks’ final hold size

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By Shruti Chaturvedi
04 Jun 2015

Allocations for a loan by KKR-owned MMI International have reignited a debate between investment banks and commercial banks about final holdings. Investment bankers argue that arrangers should be concerned about the quality of the credit, rather than what each bank in the top group holds, writes Shruti Chaturvedi.

MMI International recently wound up a $580m five year borrowing, with 11 banks joining the mandated lead arrangers and bookrunners in general. Taiwanese banks, which covered the entire retail portion of the syndication, were not left disappointed with their allocations as one of the MLABs sold down a large amount.

The loan had 10 MLABs, nine of which held between $35m and $55m on their books. But, at $13.75m, Bank of America Merrill Lynch’s hold was not only the lowest among the MLABs, it was also lower than that of lead arranger Yuanta Bank, as well as arrangers Bank of Taiwan, Chang Hwa Bank, E. Sun Commercial Bank, First Commercial Bank, Land Bank of Taiwan, Taishin International Bank and Taiwan Cooperative Bank.

Australia and New Zealand Bank, BAML, Maybank and United Overseas Bank were said to have come in as additional mandated lead arrangers and bookrunners in February, putting in commitments of roughly $86m.

BAML decided to keep a smaller portion on its books as it is one of the co-ordinators for MMI’s Singapore IPO, reckoned a banker who participated in the MMI loan. “So they didn’t want to hold that much through the loan product, and leave room for other business with the company.”

BAML declined to comment. 

MMI is testing investor appetite for an IPO of around $250m on the Singapore stock exchange. Pre-marketing for the IPO kicked off on May 26, led by joint global co-ordinators BAML and Credit Suisse, alongside DBS as a joint bookrunner. 

BAML's low hold stuck in the craw of one of the leads on the MMI loan as it meant BAML made better fees than some of the banks lower down, despite taking on less risk. “It’s not good as a market practice,” said a banker on the trade. “But if the rest of the MLABs do not mind the reduction there is nothing that can be done about it.”

Cross-asset considerations

Unlike commercial banks, which earn money primarily through loans, investment banks are more focused on the higher fee generating deals such as M&A and IPOs, said a Hong Kong based banker who works on sponsor-related deals.

“[For investment banks,] loans are just a way of making sure they are involved in the deal, as a sweetener for clients and to provide one-stop solutions,” said the Hong Kong based banker.

As a result, their capacity to take and hold loans is lower than that of commercial banks. Because of their limited balance sheet, capital is not easily available and is more expensive for investment banks, he said.

Retail banks happy

The banker who participated in the MMI loan said retail lenders welcomed the big sell-down as it meant they took a bigger piece in primary. The US bank will probably transfer more in secondary.

“During general syndication they [Bank of America Merrill Lynch] also did a market sounding for interest in secondary,” he said. “Participating banks had no problem with it [the sell-down]. We know they are underwriting the IPO process.”

While the lack of skin in the game could be perceived as unfair by commercial banks, these lenders do their own due diligence before joining a deal.

“Their decision to be involved in the deal should be driven by credit quality and not reliance on what the leads hold,” said the Hong Kong based banker.

Among the MLABs, Standard Chartered kept $55m on its books, CTBC Bank, Mega International Commercial Bank and United Overseas Bank kept $50m apiece, Australia and New Zealand Bank, Cathay United Bank, DBS and Maybank kept $40m each, Sumitomo Mitsui Banking Corp kept $35m, while BAML kept $13.75m.

Yuanta Bank joined as a lead arranger, receiving an allotment of $25m. 

Ten banks formed the arranger group. They were: Bank of Taiwan and First Commercial Bank, which took $18.5m each, Chang Hwa Bank, E. Sun Commercial bank, Land Bank of Taiwan, Taishin International Bank and Taiwan Cooperative Bank, which took $14.5m apiece, Taipei Fubon Bank, with $11.75 and Ta Chong Bank and Taichung Commercial Bank, which received $10m each.

The allocations might still have a few more tweaks but the list has been disseminated to participating banks.

Banks that joined in general earn a margin based on a leverage grid, starting at 425bp for debt to Ebitda of more than 3x. This steps down to 350bp if the ratio is between 2x and 3x and 275bp if the ratio falls below 2x. Banks that joined in senior earn fees of around 300bp and those that joined in general earned 150bp-200bp in fees.

Proceeds of the loan are for refinancing a $300m bond maturing in 2017 and a $180m 5.5 year term loan B.

Singaporean MMI was bought by KKR via a special purpose vehicle called Precision Capital in 2007.

By Shruti Chaturvedi
04 Jun 2015