cba's year end howler

Giles Parkinson

After such an extraordinary year, it was probably inevitable that it had to end in tears.

The spectacle this morning of Commonwealth Bank having to pull and reprice its $2 billion share placement – the last of a $50 billion rush by large Australian corporates in recent months – is unprecedented for an issue of such scale and a company of such repute.

Investment bankers are looking on at the debacle in amazement. Funds managers are furious, having being told they would receive stock at $27 a share, and then learning of an increase in bad debts after the placement was completed.

Funds managers now face the prospect of having to unwind hedging positions taken on the basis of the placement because the placement is now going to be repriced. Some are not sure they will even get stock in the second version. Legal action seems certain to follow.

Whatever unfolds, it seems certain that the credibility of CBA, and of the investment bank that placed the issue, Merrill Lynch, will be severely damaged. “What a complete shemozzle,” was the reaction of one senior investment banker this morning.

The $2 billion placement came as a surprise to the market as the bank was only half way through a $750 million sale of shares to replace an issue of hybrid securities.

Merrill Lynch had been managing that sale, and was hired to conduct the placement even though CBA had a closer relationship with Credit Suisse, which advised on the purchase of BankWest in October, and Credit Suisse, JPMorgan and Citi had managed the $2 billion raising that followed that purchase.

It is said that Merrill Lynch took two prices to CBA for the placement – a non-underwritten price of $27, and an underwritten price of $25. For Merrills the big difference is in fees – around 0.75 and 1.0 per cent for the non-underwritten placement, or up to $20 million, or 2 per cent for the underwritten placement, or up to $40 million.

CBA went for the non-underwritten price. Questions will now be asked of when the information relating to the level of bad debts was known, and why it wasn’t released to the market earlier – either by CBA or Merrills, or both.

For Merrills ECM team, it is a disastrous end to what was promising to be a stellar year. The $2 billion placement might have been enough to challenge UBS and Goldman Sachs for top place in Australian ECM volume for 2008, and would certainly have cemented their spot in the top 3, with a six-fold increase over the performance in 2007, when they finished in 9th place.

Now, it seems, the placement mandate is being handed to UBS – a role that will all but guarantee its position at No 1. UBS was reportedly telling managers that they had the placement, but this could not be confirmed.
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