RAISING CAPITAL
Chris Matten - OCBC
By Karen Cooper

When Chris Matten was 18, he was, in his own words, "an ardent little left-winger". But his flirtation with socialism didn't last long. "Anyone who's not a Communist at 18 has got their heart in the wrong place and anyone who's still a Communist at 20 has got their head in the wrong place," he says, quoting a well-known saying.

After graduating from London University's Kings College with a first in German Literature, he turned his back on academia and trained instead as an accountant. It wasn't long before his makeover from student radical to full-blown capitalist was complete. He ended up in Switzerland an investment banker and spent more time pondering the capital needs of banks than the works of Karl Marx.

British-born Matten soon became a recognized expert in capital management and a published author on the subject. These skills won him the job of CFO at Singapore's Oversea-Chinese Banking Corporation (OCBC), Singapore's third-largest bank. And within a few months, the former radical helped stage nothing less than a modest revolution.

Within weeks of joining OCBC in January 2001, Matten was already helping to cook up Asia's largest bank capital-raising deal outside Japan and, at the time, the biggest-ever international debt raising by a Singapore issuer. The funds were needed to bolster capital adequacy ratios to support a S$4.8 billion (US$2.6 billion) cash bid for Keppel Capital, owner of Keppel TatLee Bank, which Matten also helped plan and execute. When the exercise was completed, OCBC raised a stunning US$2.2 billion through a multi-currency issue of Upper Tier 2 debt in three currencies, earning Matten this year's Achievements in Best Practices Award for Raising Capital.

OCBC's gutsy bid for Keppel clearly made history. Ten days later, DBS Bank bid for Overseas Union Bank (OUB) but was later outbid by United Overseas Bank. The staid and cozy Singapore investment community was knocked on its ear. The government, which had long desired a consolidation in the banking sector, applauded quietly on the sidelines.

Given its rather unexciting reputation, OCBC probably needed a campus radical to shake off its conservative past. Its offer for Keppel was effectively hostile - a rarity not just in Singapore but for bank deals worldwide - and had to be prepared in almost total secrecy. And the bank decided to go entirely for debt: specifically ten year subordinated debt, raised in three currencies simultaneously via a book-building process in Asia, the US and Europe.

According to Patrick O'Brien, joint head of debt capital markets in Asia at UBS Warburg, OCBC's advisor and lead manager on the financing: "The deal represented a mindset change in Singapore," says O'Brien. "No other Singapore company had fully engaged international capital market investors in that way. OCBC basically rewrote the story," he says.

More Than Adequate

Matten's expertise was critical, particularly his background in capital management. "The more I looked at it, the more I realized the challenges facing OCBC were things I could help with," he says. For a start the bank had surplus capital. Limited by the relatively small pool of lending opportunities, Singapore banks have historically had capital adequacy ratios far above minimum requirements. This presented an opportunity, Matten reckoned.

He spent his first week, which was Chinese New Year, in an empty office, poring over 14 files including a dossier on a possible bid for Keppel. Three months later, a small team was working "pretty much full steam" on an offer, known as "Project Thunder". With the bid expected to roughly halve OCBC's Tier I capital adequacy ratio from 21.6 percent, Matten knew he needed to raise debt. As most of its capital was in the form of Tier 1, he opted for an issue of Upper Tier 2 debt.

"Funds for a bank are not a problem," he says. "You can go into the inter-bank market and raise S$5 billion (US$2.7 billion) in two days. The constraint on a bank is not cash, it's capital. So many people confuse the two. You can be capital constrained and have loads of cash. Or you can have loads of capital but no cash."

Bridging finance was too costly. "We thought, 'Why not go to the debt market? We're ready, we're ahead of the game.' We were aware that once we'd gone to the market others would follow. So the view was let's go first and take every dollar we can out of it." The bank and its advisors went to great lengths to keep their work secret. "The analogy of a terrorist network is the wrong one to use these days but the trick was having individual groups focussed only on what they needed to know," he says.

Matten had read parts of Sun Tzu's Art of War. "You prepare your troops, build a massive army so the enemy doesn't know it's there and then strike full force and as quickly as possible," says Matten. "That's the way to gain initiative in battle," he says. The plan worked. The market was taken by surprise when OCBC announced its bid on June 12. Even Keppel executives were said to have been caught off-guard. Eight days later the US$1.8 billion offering, "Project Lightning", was announced and two separate roadshows were underway. The Singapore and US dollar tranches (S$1 billion and US$1.25 billion respectively) were priced on June 29 while the euro portion was priced on July 3. In all, just over US$2 billion was raised.

The 17-day time frame was particularly aggressive for a debut issuer. It didn't help that some overseas investors were geographically challenged ("Why do you have exposure to Malaysia?" asked one) and that DBS launched its bid for OUB the same week.

But the appetite was there. Almost half of the US dollar tranche was taken up by US and European investors, 82 percent of the euro tranche went to Europeans and almost all of the Singapore dollar tranche went to Singapore-based investors. A planned sterling tranche was scrapped.

Matten then hedged the bank's foreign currency exposure and swapped most of the debt into floating rates, significantly lowering the cost of the issue. "Chris's decisiveness in the hedging strategy saved them a substantial amount of money," says O'Brien.

How Do I Rate?

Having raised the money, OCBC needed the backing of Keppel Capital's major shareholders. They agreed in mid-July to an improved offer of S$5.2 billion. In hindsight, Matten says one of the keys to the deal's success was starting the ratings process early and helping agencies understand the deal. "I think a lot of issuers don't fully appreciate the value of having good relations with the ratings agencies," says Matten.

"When you come out with something like an acquisition or major piece of news, you need to have the agencies understand it and come out with their own research. This enables them to react very quickly and come out with formal ratings for the bank," he says, adding: "So when we went on the roadshow we were able to have a rating."

After the bid and financing, OCBC estimates its total capital adequacy ratio has come down to a pro forma 17.9 percent from 21.6 percent in December 2000. Matten says his target is 14 percent, compared to a legal minimum of 12 percent. Cash return on equity has risen from 10.7 percent to a pleasing pro forma 18.3 percent.

Matten describes it all as the best fun he's had in his working life. More importantly for Singapore, he says, is that "it will no longer necessarily be the 'club' that decides things behind closed doors." He adds: "We have prised open the market to a more transparent way of doing business."