In a highly unusual move, KB Financial Group, the owner of Korea's Kookmin Bank, has replaced all of the four international banks mandated for its upcoming rights issue and brought in Goldman Sachs and Morgan Stanley to arrange the deal instead.
It is unclear exactly what has transpired leading up to their dismissal late last week, but based on information from numerous sources, it seems clear that Bank of America-Merrill Lynch, Citi, Credit Suisse and J.P. Morgan lost their earlier mandates because of a disagreement over fees. Basically, KB Financial, which is still commonly referred to as Kookmin, wanted to pay a 60bp fee, or 0.6% of the capital raised, which the four mandated banks thought was too low.
Kookmin's view, which sources say it communicated quite openly to parts of the Korean media over the weekend, is that the four banks had initially agreed to the 60bp fee, supposedly to win a role on the highly coveted deal, but once selected, they said they needed a higher fee to complete the transaction. This is backed up by some sources who say that when banks pitched for a role on the rights issue they had to provide information on what size deal they recommended, what discount would be suitable and at what fee they were willing to do it. However, other sources close to the four discarded banks say it wasn't as straight forward as that, and some argue that fees weren't discussed until after the banks were already selected.
Either way, angered by what it reportedly saw as a tactical play, Kookmin let them all go and on Thursday last week offered Goldman and Morgan Stanley to take over the mandate -- at the same low fees -- which they agreed to do. The two domestic banks which are also mandated, Samsung Securities and Korea Investment and Securities, will remain on the deal.
While this is not a deal that will make any of the participants rich, it is still an important deal from a Korea franchise point of view. For one, the rights issue is expected to raise about W2 trillion ($1.6 billion), making it the largest Korean equity capital markets offering year-to-date and one of the largest in recent years. As such, it will give the participating banks valuable league table credits, which can be used as proof of prior activity in the country when they pitch for future mandates. And it is therefore a loss that will be felt by the four banks that are now off the deal -- even if they felt that there was no economic justification to do the deal at a 60bp fee.
There is no question that this is a low fee. Shinhan Financial Group's W1.3 trillion ($880 million) rights issue in February paid 225bp and several sources said that it had initially been assumed that Kookmin would follow its lead with a fee in the same neighbourhood. However, the Shinhan deal, which was arranged by BNP Paribas, J.P. Morgan and UBS, did come at a time when the equity markets were still very depressed and when it would have been much harder to find willing underwriters and sub-underwriters. Thus, one can argue that it is reasonable for Kookmin to bring the fees down somewhat -- exactly how much is another issue.
According to some sources close to the deal, the issue isn't just the fees but the fees in combination with the structure of the deal. For instance, a wider discount on the rights issue would reduce the risk for the banks and if the deal was done on a best-effort basis as opposed to a fully-underwritten trade, a lower fee could be acceptable.
And this is where much of the confusion arises as the four banks initially mandated, based on information provided by numerous sources, seem to have different views of what was agreed with the issuer. In fact there are more views on this than there are banks involved. Some say the initial agreement included a specific fee, some say it didn't. Some say a 60bp fee was agreed, but it referred to a deal on a best-effort basis, and to translate this into a hard underwritten commitment the banks should get compensated for the sub-underwriting cost of about 75bp -- in other words, their fee needed to increase to about 135bp. One source said the basis on which the banks were selected was very vague and argued that Kookmin may have had separate negotiations with each bank and then tried to correlate it all into one deal structure once they were on board.
By contrast, the mandate offered to Goldman and Morgan Stanley seems pretty straightforward: they will fully underwrite a deal of about W2 trillion at a discount somewhere in the range of 20% to 25% and they will get paid 60bp for their efforts.
So how come these two banks can do the deal at this same low fee? Basically it seems they are making a different assessment of the risk involved which centres around the fact that the pricing of rights issues in Korea are much more formulaic than in other countries in Asia. The final price is based on the volume-weighted average price over a set period with a reference price set soon after the announcement of the issue. However, a second reference price is set just before the subscription opens (about a month or so later) and since the discount is fixed against the lower of the two, the underwriting banks will only carry the risk during the actual subscription period (about five days).
This could mean that Goldman and Morgan Stanley feel they don't need to sub-underwrite that large a portion of the transaction. However, even if they do, sources say there is strong demand among Korean securities houses to sub-underwrite the entire deal at a price that will allow the international banks to keep a portion of the fee.
That said, both Goldman and Morgan Stanley initially pitched a higher fee, so they obviously didn't think it was worth doing the deal at these levels to begin with. But it seems the possibility to steal some league table credit away from four of their major competitors and build some goodwill with Kookmin may have been too powerful to resist - even if it means doing the deal at a very low (non-existent?) compensation.
Marketing for the rights offering is expected to launch as early as next week, which means it will be set for completion in August.