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Shavasb Bohdjalian
Bank of Cyprus, the island’s largest lender announced another capital raising plan aimed at boosting up its capital in order to be able to withstand a larger haircut on its Greek sovereign bond holdings, but the Board of Directors and Management should also contemplate disposal of non-core assets as an effective way to boost the capital adequacy ratios.
Bank of Cyprus has called an EGM on Monday 5 December 2011 to approve the proposed share capital increase through a rights issue and the issue of Mandatory Convertible Notes that will be offered for voluntary exchange to all Convertible Enhanced Capital Securities (CECS) holders.
After the completion of the Voluntary Tender Exchange Offer and the issuance of the new ordinary shares from the redemption of Mandatory Convertible Notes (MCN), new bonus shares will be issued and granted in the ratio of one bonus share for every three new ordinary shares resulting from the redemption of MCN with new shares. The Board will also propose the increase of the authorised share capital of the Bank from EUR1.5 bln to EUR3 bln to open the way for the various conversions in the future.
The new capital increase, coming so soon following the previous rights issue and similar capital raising exercises made by other banks risks exhausting investor appetite in such issues, since Management and the Board keep asking for fresh money from shareholders, but they have not taken any measures to defend the share price, which appears to be in free-fall.
Bank of Cyprus shareholders are sustaining a massive decline in their net worth considering that the share price of the Bank is down by about 70% since the start of the year, and about the same since the previous rights issue when the share price was hovering around EUR 3.60.
The “patriotic bet” placed by Management and the Board for investing in Greek sovereign bonds has become a major boomerang for the bank’s shareholders who not only are suffering a massive decline in the share price, but see no light at the end of the tunnel.
If one considers that end of 2009, Bank of Cyprus Management was boasting that it had no significant exposure to Greek bonds, hence their claims that there was nothing to worry, shareholders are fully justified to ask why did Management with the backing of the Board decide to risk shareholder money and invest in Greek bonds in early 2010 when it was obvious that things were rapidly deteriorating in Greece.
If the Bank was “forced” to buy Greek bonds in view of its operations there and perhaps in response to an invitation by the Bank of Greece to do so, then this may be understandable. But if they invested in Greek bonds on their own initiative, then it raises serious questions and doubts with respect to the claim made by the Bank that it acts in a responsible manner in the best interests of its shareholders.
As for the claims made by Management that the Bank had no exposure to US toxic assets, that may well have been true, but unfortunately, the Bank has a very big exposure to local toxic assets in the form of Cyprus government debt and massive loans to the local property market.
The Bank may well blame the recent sharp rating downgrades on the government’s mishandling of state finances and the problems in Greece, but it is mostly to blame for investing in Greek sovereign debt and for excessive lending to the local property market, which have been cited as additional reasons why the ratings agencies have quickly reduced Bank of Cyprus to just a notch above junk status.
Since the future prospects of Bank of Cyprus in the next couple of years are bleak as it faces a prolonged depression in Greece, recession in Cyprus and will have to take massive write-offs on its local property holdings, there is a good chance that the Bank will miss its next year’s profit target, which means the likelihood of the Bank asking for more capital next year will increase.
But there is so much that local investors can do as many are also feeling the effects of the recession and are most likely to put their money in their own businesses or shift money abroad in search of much safer assets with better return prospects.
The Bank’s ability to raise money from the local market is fast diminishing which is why Bank of Cyprus and other banks need to contemplate the disposal of non-core assets and seek new capital from international investors.
The Bank should immediately form a task-force to identify various assets and consider selling them off in batches or in one go depending on the complexity of the asset and demand. Money raised from such an exercise will not only boost the bank’s liquidity and shield it from future write-offs but it will also free up capital, reducing the need for future calls for capital from shareholders.
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(Shavasb Bohdjalian is an approved Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10 and approved by the Cyprus Stock Exchange to act as Nominated Advisor for listings on the Emerging Market. The views expressed above are personal and do not bind the company and are subject to change without notice)
