On May 2, Bank CenterCredit (BCC) announced repurchase of 8.625%-coupon bonds maturing in January 2014. The repurchase will take place on May 11 using a modified Dutch auction with an initial (minimum) price of 103% of face value. The purpose of the buyback is to optimize the bank's liabilities and reduce the cost of debt. BCC reserves the right to choose the volume and price of the bond repurchase. All bonds that are not bought by CenterCredit at the auction remain in circulation and will redeemed at maturity in accordance with the prospectus terms. Participation in the buyback is voluntary, but the repurchase is structured in a way that entices bondholders to take part in it.
Following the announcement of the buyback, the bond price rose from 102.35 (YTM 7.10%) on as of May 2 to bid-ask prices 102.97-103.27 (YTM 6.888%-6.572%) as of May 8. The range of current prices includes the minimum price of redemption.
Our view. We believe that the buyback offer is attractive to bondholders as it allows them to free up cash at a nice premium, even at the minimum price (103%). After the auction, the bond price will fall back, albeit will remain above levels observed prior to the buyback announcement. Since the price decline after the auction is very likely, we expect the auction to attract many bondholders.
Should BCC receive funding from its largest shareholder, Korea’s Kookmin Bank, yields on Kazakh bank’s bonds will decrease as the market will price in a higher likelihood of support by the shareholder. To Kookmin, the early redemption of BCC bonds makes sense only if the Korean bank can fund CenterCredit at a rate lower than 6.8%, the price point where BCC is now willing to buy the bonds back. Kookmin’s current cost of funding (about 4-5%) leaves room for cost optimization at BCC. Therefore, additional buybacks remain a possibility. We note, however, that continuation of the auctions will reduce the bond yield and will make further optimization impractical.
BCC has also perpetual a 9.125%-coupon bond with a call option after March 2016. Taking into account the high coupon on this issue and BCC’s focus on reduction of its cost of funding, we see a high probability of the bank exercising the call option in four years. The current bid-ask quotes 82.27-83.00 (YTM 15.45%-15.59%) on the perpetual bond present a good investment opportunity, and we recommend investors to buy this issue.