RHB Bank to acquire RHB Capital's assets for debt repayment: Moody's

The MYR2.1b external debt will be paid off.

RHB Capital Berhad recently announced that it would issue new shares through a rights issue for up to MYR2.5 billion ($680 million) and inject this capital into its main operating entity, RHB Bank Berhad.

According to a release from Moody's Investors Service, RHB Bank will then acquire assets of RHB Capital, which will use the proceeds to repay its MYR2.1 billion external debt.

This plan is credit positive for RHB Bank because it will enhance the bank’s capital buffer and improve the bank’s ability to retain capital through the repayment of debt at the holding company level.

RHB Bank will acquire from RHB Capital the net assets of RHB Investment Bank and RHB Insurance Berhad at book value or less. RHB Bank’s pro forma common equity Tier 1 (CET1) ratio will improve to around 11.1% after the rights issue and acquisitions, from 10.6% at the end of 2014.

Here's more from Moody's Investors Service:

The second benefit to RHB Bank will be its improved ability to retain capital because all external debt at the holding company level will be repaid.

At the end of 2014, RHB Capital operated with a high double leverage ratio of 137% and relied heavily on dividends from RHB Bank.

The repayment of borrowings and the purchase of assets by RHB Bank will completely remove double leverage at the holding company level and eliminate the risk that RHB Bank will have to upstream more dividends to fund the holding company’s debt and dividend payments.

Following the reorganization, RHB Capital will be liquidated.

The plan will be finalized in the fourth quarter of 2015, and requires approvals from shareholders and regulators.

We think that the plan has a high chance of going ahead because the rights issue requires shareholder approval of at least 50%+one share, which RHB Capital will likely obtain from its 41.49% shareholder Employees Provident Fund and other shareholders.