Having spent the past six months trying to time a share sale in SK Telecom (SKT), parent company SK Corp could hardly have picked a worse moment to complete a deal. However, conscious that it had already pulled back once this year because it felt the wireless operator's share price was not high enough, the company found the determination to see the process through this time round. And non-lead syndicate bankers believe that it came out the other side with a deal, which held together remarkably well considering the state of the underlying global equity markets.
For lead managers Credit Suisse First Boston and Goldman Sachs it was a particularly exhausting experience trying to hold a book together and keep investors focused in the face of constantly gyrating equity markets and lengthy roadshows. But an unexpected rally the night before pricing - which saw the Dow Jones record its second biggest one-day gain in history - gave the deal a final necessary push and has resulted in the successful completion of the year's second largest equity offering.
In total, the oil company has raised $1.68 billion from a combined ADR and exchangeable offering, which marks the third from the region after China Mobile and Korea Tobacco & Ginseng (KT&G). The split between the two portions had been set at the beginning of roadshows and comprised the monetization of a roughly 8.2% stake via a 2.23 million share ADR sale and 5.1 million share exchangeable.
With nine ADRs to one share, a 20.07 million unit deal was priced ahead of New York's open (Thursday) at $21.54, representing a 3.6% discount to the last sale and 5% discount to the stock's Won238,500 close in Korea. Total proceeds amounted to $430.8 million and there is no greenshoe. In relation to recent privatizations from Korea pricing seems wide, but in relation to non-privatization offerings, it is the second tightest on record.
Raising $1.25 billion, the exchangeable was issued in the name of Momenta (Cayman), an SPV which holds the SKT shares and issued notes exchangeable for SKT ADRs. Having pre-marketed the deal with a 2% to 2.5% coupon and 25% to 30% exchange premium, the leads priced at the outer end of the range on a 2.5% coupon and 26% exchange premium to the ADS price. With a five-year final maturity, the Baa3/BBB- rated deal has a call option in year two subject to a 120% hurdle and three-year put at par.
Underlying assumptions comprise a bond floor of 92.6%, implied volatility of 23% and theoretical value of 106%. This is based on a credit spread assumption of 185bp over Libor, 0% dividend yield, 1.5% stock borrow cost and 35% volatility assumption.
Representing 150 days trading volume for the ADR, the exchangeable will increase the existing float by about 20% on full conversion.
Exceptionally difficult market conditions meant that deal had to incorporate a slightly higher coupon than would otherwise have been expected, plus a relatively high bond floor for a borrowable stock and cheap implied volatility versus outstanding comps such as Korea Telecom, which was trading at 30.44% and KT&G, which was trading at 26.99% at the time of pricing.
However, because the stock had been under pressure, terms could be balanced slightly with a higher exchange premium. The deal is also the first from Asia with full dividend pass through and the first exchangeable worldwide to extend voting rights. It is also the largest equity-linked offering to be launched from Korea, although an increase to a Korea Telecom exchangeable after its pricing last December, means that SK Corp stands as the second largest overall.
In terms of the deal's respective order books, observers say that both closed about 1.6 times covered, with 110 investors for the ADR and 200 for the exchangeable. There were said to be about six lead orders above the $25 million mark for the ADR and in terms of overlap, about 30% of participants in the ADR were funds that could invest in either straight equity or equity-linked instruments compared to about 20% of participants in the exchangeable.
In terms of geography, the ADR had a split, which saw 50% placed in the US, 26% in Asia and 24% in Europe, while the exchangeable saw 20% placed in Asia, 42% in Europe and 38% in the US.
In the run up to pricing, one of the greatest challenges was to stop investors shorting the stock in a falling market. As one banker explains, "In normal market conditions, a combined offering makes a lot of sense. As a company gets its equity story across and momentum starts to build, the stock typically stays quite stable. Investors worry they won't get filled and so there's some buying pressure to compensate the hedges being put on by convertible funds.
"But," he adds, "In volatile markets, accounts know they're more likely to get their allocation and both straight equity and converts funds feel more confident in shorting the stock right down."
In this case, volume in SKT ADRs increased from 800,000 a day one week before pricing to 2.5 million a day in the run up to pricing. In the final week, the stock also fell from about Won270,000 to Won238,500.
Over the course of the entire filing and marketing period, however, it held its own, falling 9.5% to pricing. This compares well to the performance of, for example, the Dow Jones, which was down 13.2% over the same period, the Nasdaq down 11.9%, the FTSE down 17.5% and even the Kospi down 6.9%. Year-to-date, the stock is down 11.01% and only briefly hit the company's target monetization price of Won290,000 in early March.
Analysts now believe that SK Corp has gone a long way to removing a heavy overhang over the stock in which it owned a 26.8% stake pre-sale. So too, should the company decide to swap proceeds from dollars into Won, it will have benefited from its six-month wait in one respect as the currency has appreciated 12% since the beginning of the year.
For SK Corp, the transaction has always been viewed as a means of managing its debt profile and in particular reducing short-term debt, which stood at $2.2 billion as of March 2002. The large size of the exchangeable relative to the ADR means that contingent liabilities will increase over the short-term, but coverage ratios should improve over the medium-term as conversion occurs.
Standard & Poor's estimates that EBITDA to interest coverage should rise from two to three times within a year. It also believes that debt to capital will fall from 53% as of December to 40% over the next two to three years.
The agency concludes, "The exchangeable bond will increase contingent liabilities at SK Corp in the immediate term, but will not have a significant impact on its credit quality as proceeds are expected to be used to pay down existing debt and will result in a lengthening of its debt maturity profile."
SK Corp's outstanding $250 million 2006 eurobond has been one of Asia's better performing issues over the last year, having tightened from a 255bp Treasury spread at launch to 100bp over by early July. However, as a result of pressure in the credit default market, five-year CDS spreads have widened nearly 50bp in the space of three weeks as investors bought protection ahead of the exchangeable. This has consequently impacted the bond issue, which was quoted at yesterday's close in Asia at 109% to yield 4.77% or 129bp over.
As the new deal settles into the market, credit analysts believe the bond is poised to tighten again, while equity analysts believe the monetization has successfully set the stage for the stock to rally.
Alongside the leads, co-managers comprised ABN AMRO, Deutsche Bank, HSBC, ING, Lehman Brothers and SG Securities.
