Shin Kong upsizes GDR to $375 million

After two days of bookbuilding, Taiwan's Shin Kong Financial Group yesterday priced its first-ever global depositary receipt at a tighter discount than it initially seemed to have hoped for and strong demand also allowed it to increase the offering by 25%. According to a source, the deal size was upsized to $375 million from $300 million, which brings the financial holding company a step closer to its earlier stated equity recapitalisation target of NT$18 billion ($550 million).

The price was fixed at a 9.9% discount versus yesterday's closing price of its Taiwan-listed common shares, while the structure in place when the deal was launched after the close of trading on Monday would have allowed for a discount of up to 20%. For instance, in parallel with the GDR sale to international institutions, the company also offered to sell common shares to its unaffiliated existing shareholders to give them the opportunity to prevent a dilution of their holdings. The latter was a feature put in place earlier this year when the Taiwan securities regulator changed the rules on follow-on sales to allow the maximum discount to be set as wide as 20% -- up from the previous maximum of 10%.

The intention with the parallel offering is to make sure that a company's domestic shareholders, many of whom are retail investors, don't automatically get hit by a dilution at a discount as steep as 20%, but at least have the choice to participate. Under the new rules, they have the right to subscribe to as many shares as are needed to lift their holdings by the same percentage as the increase in the overall share capital. In the case of Shin Kong, this meant they could subscribe for an amount equal to about 17% of their existing holdings.

Issuers who commit to price their shares according to the previous rules, i.e. at a maximum discount of 10%, don't need to offer such a parallel sale. Like before, the discount can be calculated either based on the latest closing price or based on a volume-weighted average price over the past one, three or five days, giving the issuer a bit of extra leeway. Memory-chip maker Inotera Memories, which is currently in the market with a GDR offering of about $300 million that is scheduled to price on July 30, has opted for the latter structure.

Because Shin Kong kept the discount below 10%, it had the option to cancel the offer to existing shareholders, and indeed it chose to do so. The source noted that this portion of the sale was always expected to be small and the fact that the company was able to upsize the GDR offering by $75 million more than made up for the loss of that capital.

Shin Kong is in need of capital to shore up its life insurance unit, which -- like other Taiwan life insurers -- is under pressure due to the challenging economic conditions and extremely low interest rates that are weighing on its profitability. According to Fitch Ratings, last year's substantial decline in the Taiwan stock market, volatility in foreign exchange rates and deterioration in credit quality of structured securities, also weakened the capital strength of most Taiwan life insurers, including Shin Kong Life Insurance Company. And while the stock market has rebounded, the volatility in the market and in FX rates will continue to put pressure on the sector, Fitch predicts.

Shin Kong has said that the proceeds raised from the GDR will be injected into the life insurance unit, which accounts for 75% of its total assets. The unit is the third largest life insurer in Taiwan with a market share of just over 10%. 

The GDR price was fixed at $8.91, which based on the prevailing exchange rate and the fact that each GDR accounts for 25 common shares, translates into NT$11.713 per Taiwan-listed common share. The share price declined by 7.11% during the bookbuilding, including a 4.4% drop yesterday, which means that the discount versus the price at launch on Monday (NT$14) was wider, although the extent of the fall can be considered quite normal for a deal that is done against a live price.

The final price means Shin Kong will sell 42.088 million GDRs, which correspond to 16.8% of the existing share capital.

The deal was said to have been multiple times covered before being upsized (the bookrunners went out with a message to investors on Tuesday that it was covered) and according to the source, a few investors actually increased their order sizes after being informed yesterday that the deal would be enlarged. Most of the investors were also said to have been quite insensitive to the price, in other words they were happy to stay in at an unchanged order size even was the discount was tightened to below 10%.

All in all, about 70 investors participated in the transaction, which was jointly arranged by Goldman Sachs and Morgan Stanley. The majority of the buyers were from Asia, followed by US and European accounts, in that order.

While some investors bought into Shin Kong amid a belief that the recapitalisation will put the company in a better position to benefit once the market recovers and thus result in a lot of upside, others were attracted by the fact that the stock has underperformed its sector peers in the past 12 months and is trading at a discount versus both Cathay Financial and Fubon Financial with regard to key metrics like price-to-embedded value and price-to-book.

Shin Kong's share price has bounced 95% from its low of NT$6.65 in early March, but is still 25% to 30% below where it was in August last year when it traded above NT$18.