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Cosmos Bank inks MOUs on debt-to-equity switch

Subsidiaries of China Development Financial Holding Co (中華開發金控) and Shin Kong Financial Holding Co (新光金控) on Friday each signed Memorandums of Understanding (MOU) with Cosmos Bank (萬泰銀行), agreeing to let the smaller and cash-strapped bank reconstruct its capitalization.

The signing of the MOUs will allow China Development Industrial Bank (中華開發工銀), Grand Cathay Securities Co (大華證券), Shin Kong Bank (新光銀行) and Shin Kong Life Insurance Co (新光人壽) to convert their debt holdings in Cosmos into shares, the companies said in respective filings with the Taiwan Stock Exchange on Friday night.

The companies said that they agreed to the debt-to-equity conversion scheme to reduce losses in their debt holdings in Cosmos. But the filings said the MOUs were non-binding, meaning that definitive extension agreements will not be reached until the terms of the contracts are accepted by all parties.

No financial terms were revealed in the filings.

Cosmos, the nation's largest cash card issuer, has been under increasing regulatory pressure to recapitalize or face government receivership.

On Aug. 31, the bank announced it signed an MOU agreeing to sell a controlling stake to the SAC Private Capital Group LLC, a US hedge fund, and to GE Money, the global consumer lending unit of General Electric Co, after SAC and GE Money agreed in principle to invest US$650 million and US$250 million respectively, into Cosmos for a combined 80 percent stake in it.

But the completion of the capital injection, which is due to close by the end of this year, hinges on whether Cosmos' major creditor will agree to convert their debt holdings into equities of the money-losing lender, as the new investors hoped to see a lower debt burden while their control takes effect.

Creditors, who were concerned they might lose their debts holdings in Cosmos given a government receivership, finally agreed to the conversion proposal after days of negotiations with Cosmos.

China Development Industrial Bank holds NT$3.125 billion (US$94.6 million) in convertible bonds in Cosmos, Grand Cathay Securities has NT$4.625 billion in subordinated debts, Shin Kong Bank owns NT$3.125 billion in convertible bonds and Shin Kong Life Insurance has subordinated debts worth NT$700 million.

The China Development Financial and Shin Kong Financial filings were issued after the local stock market closed. Cosmos shares dropped by the daily limit to close at NT$3.83. Shin Kong Financial rose 0.16 percent to NT$30.45, while China Development Financial remained unchanged at NT$13.15.

Based on the amended Resolution Trust Committee Fund Regulatory Provisions (金融重建基金設置及管理條例), the government no longer provides guarantees on a failed bank's financial debentures and subordinated debts if issued after July 2005, while interbank creditors are given no protection by the government's rescue funds.

This means that subsidiaries of China Development Financial and Shin Kong Financial must bear the losses by themselves on Cosmos' debts issued after July 2005 in the case of a government receivership of Cosmos.
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