Morgan Stanley broke new ground and records yesterday (Tuesday) with the completion of an accelerated $533 million block trade for Shinhan Bank. Where previously international Korean equity deals have used ADR or GDR formats, this one was structured as a domestic placement and represents the largest on record.
Domestic placements have traditionally been few and far between in Korea because of the country's onerous rules on crossing shares. Shares can only be crossed subject to a maximum pricing discount to spot of 7%. Yesterday's whole trade also needed to be crossed from the seller (Shinhan) via the agent (Morgan Stanley) to the 80 strong order book within a 50 minute window before the stock started trading today.
In Hong Kong, where placements are commonplace, there is no cap on the discount at which shares can be crossed and they only have to be crossed between the issuer and investment bank before the stock resumes trading. They are then legally crossed with investors over a more leisurely two-day window.
"When market conditions were weaker the 7% discount rule always put a lot of people off because they feared there wouldn't be enough leeway to clear a trade through the market," says one specialist.
And while international equity issues from Korea have often been priced at extremely tight discounts to spot, investors have equally had time to short the shares down first. In this case, the book was only open for one hour after Korea's close.
Shinhan was also keen to get a deal out to market quickly because it is up against a deadline to dispose of its Treasury shares. "There was no need to go through formality of the GDR listing process," the specialist adds. "No need for documentation. This represents a much quicker and cleaner process for them."
After a one hour bookbuild at a fixed discount of 2.78% to the stock's Won21,600 close, the deal closed two times oversubscribed. About 80 accounts participated of which 10 were from Korea and about 40 were new to the stock.
By geography, the deal had a split of 50% Asia, 25% Europe and 25% US.
The 29.873 million share deal represented 10.2% of the group's outstanding equity, 12% of its freefloat and a relatively slim 24 days trading.
Pricing at such a marginal discount following a 13.39% appreciation in the share price year-to-date will be viewed as a successful result. Shinhan's share price spiked from about Won19,000 to Won23,600 over the first two weeks of February as the whole banking sector benefited from renewed M&A fervour after Citigroup purchased Koram. However, Shinhan's price has come down again since then as investors take profits and the group is currently trading around 1.2 times 2004 book value.
The Treasury shares were created by the formation of a Financial Holding Company structure in 2001 and the bank has been waiting for an opportune moment to dispose of them ever since. The sale will now boost tier 1 equity from 6.34% to 6.75%.
This is because the shares were originally marked on Shinhan's balance sheet at their acquisition cost, which averaged Won13,000 per share, but can now be marked at yesterday's selling price of Won21,000.
Hana Bank had been hoping to follow Shinhan's lead and improve its capital ratios by re-selling shares it intended to buy back from the government. However, this may not now happen given a move by the Korea Deposit Insurance Company (KDIC) to shortlist eight banks for a sale of its own.
Bake-offs are taking place between Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, JPMorgan and UBS on the international side, with Daewoo, Hyundai and Samsung on the domestic shortlist.
According to the government's original plan, Hana was to buyback 9.3% of its shares from KDIC by June 2004 and a further 12.4% by June 2005. The first batch of shares have a buyback price of Won19,950. Since the stock closed yesterday at Won26,450, this means Hana would be able to book a significant profit by on-selling the shares to the market.
Specialists say KDIC is considering two options. It may either sell its entire 21.7% stake in Hana or just the 12.4% stake Hana is due to buyback in 2005. If it chooses the former option it could raise up to $1 billion based on yesterday's close and if chooses the latter, about $550 million.
