CHINA Merchants Bank said today it plans to issue up to 30 billion yuan (US$4.34 billion) of subordinated bonds to boost capital.

The move came on the heels of its planned acquisition on Hong Kong's Wing Lung Bank.
The Shenzhen-based bank plans to issue the bonds with a maturity of more than 5 years in domestic or overseas markets. If sold overseas, the issue will be no more than 10 billion yuan, the country's sixth biggest bank in terms of assets said today in a filing to the Shanghai Stock Exchange.

The bonds will be issued to institutional investors in China's inter-bank bond market.

In the event of bankruptcy, subordinated debt holders receive payment only after senior debt claims are paid in full.

The bank will hold a shareholders meeting on June 27 to gain approval on both the bond sale and its acquisition on Wing Lung Bank. The moves are also subject to approval by Chinese financial regulators.

Merchants Bank said last week it would pay a combined HK$19.3 billion (US$2.47 billion) for a 53.12 percent stake in Wing Lung.

The purchase price is equivalent to about 2.91 net book value of Wing Lung at the end of 2007. The acquisition should be completed in the third quarter.

Merchants Bank would then be required to make a general offer for all issued Wing Lung shares, leading to a total cash consideration of 32.4 billion yuan for the whole deal.

Analysts said the deal would squeeze Merchants Bank's capital in the short term, but is a positive move for its long-term expansion.

"In the short term, the acquisition may cut Merchants Bank's capital adequacy ratio and they seem to be paying a bit too much," said Wu Yonggang, a Guotai Jun'an Securities Co analyst. "In the long run, the expansion is good as it gives them access to a new market."