Shinhan launches $1.15 billion rights issue

Shinhan Financial Group, Korea's oldest financial-holding company, has launched a rights issue that will raise up to W1.6 trillion ($1.15 billion) and will increase the group's share capital by 17%.

The issue means that Shinhan is the first Korean financial institution to seek new capital, following similar moves by Standard Chartered and DBS.

The motivation for the deal, says Shinhan, is pre-emptive: to "prepare for potential contingencies that may result from the current economic environment". The group says that it is not suffering from liquidity or financial problems, and that it satisfies regulatory capital adequacies ratios (CAR).

A note released by Morgan Stanley says that Shinhan's CAR has been "of concern to investors". At 4.6% in the fourth quarter of 2008, the ratio is lower than that of its peers. For this reason, Morgan Stanley says that raising capital via the rights issue is a good idea.

Morgan Stanley writes that the CAR after the rights issue will be 5.5%, which it believes is not enough considering issues relating to Shinhan's high level of leverage. "If the macro environment deteriorates faster and more than expected, the market could be concerned about additional dilutions."

The report goes on to criticise the company's management for not adequately communicating the rationale for the issuance, as well as failing to provide a plan for avoiding future dilutions.

A Citi report says that the capital injection "should be" enough for future eventualities. It holds that Shinhan should be able to maintain a CAR above 4% throughout 2009, even if non-performing loans (NPL) were to rise above 4.5%. Therefore after the issue, Citi says that the CAR should be enough to tolerate a NPL ratio of 6.5%. 

The rights issue comes after quarterly earnings undershot expectations. In the fourth quarter of 2008, net profits were W284 billion ($205 million), down 25.7% on the same period in 2007, and 12.2% down on the third quarter of 2008. 

BNP Paribas, J.P. Morgan and UBS are working on the deal. BNP Paribas is also Shinhan's largest shareholder, with 8.73%, and it has already said it will take the rights shares that it is entitled to.

Rights issues in Korea are unlike similar deals in other countries in that there is no fixed price at the launch of the deal. Regulations require for the price to float until a certain date, when it is then set by a standard formula. For the Shinhan deal the subscription price is to be finalised on March 13, with an intermediary pricing point on February 13.

The problem this creates for the issuer is that it does not know for sure how much money it will raise until the pricing date. This means that the company could raise more money than it needs, or even too little. The $1.15 billion assumes a full subscription and a price to be determined by the formula. 

Other regulations make certain things unclear for shareholders. Out of the proposed 78 million shares, 20% will be offered first to members of Shinhan's employee stock plan, with the remainder being available to other stockholders. Employees often take advantage of these schemes, but due to the considerable size of the deal, sources say that they might not take all that is offered to them. If employees do take all the shares available to them, it will lead to an entitlement ratio of one rights share for approximately every five shares.