April 20, 2014

EW to issue preferred shares

The Philippine Daily Inquirer today reported that EastWest Bank (EW, Buy) plans to generate as much as P5b through a preferred share issuance. The bank previously disclosed that it has secured board approval to issue 500m in perpetual preferred shares that would qualify as additional Tier 1 capital under Basel 3.

The article quoted the EW president as saying that diversifying the bank’s equity structure will allow preferred shareholders to enjoy reasonable yield without being dilutive to common shareholders.

Our take: While the details of the offering yet to be set, we believe that the planned preferred share issuance may have a non-viability loss absorption feature similar to recent Basel 3 compliant Tier 2 issuances by other banks. This means that the security will be written down if the bank is declared non-viable by regulators.

Moreover, in order to avoid possible dilution issues, we expect the preferred shares to be non-convertible to common shares, except in cases of non-viability. In all, the preferred issuance will allow the bank to raise Basel 3 compliant additional Tier 1 capital and strengthen its equity base without the need for a dilutive common share issuance. – WealthSec