Books for a 6.84% sell-down in Posco (Pohang Iron & Steel) have just closed in New York (Thursday EST). With Merrill Lynch and Salomon Smith Barney as lead managers, the Korea Development Bank (KDB) has forged ahead with a third attempt to offload its stake and complete the government's privatisation of the steel company.
An accelerated bookbuild conducted over the last 48 hours has resulted in books closing oversubscribed, with what is described by bankers as a "full book of true demand". The key question, however, remains whether the bank will decide to sell the 23.1 million unit offering at what will be a 1.5% discount to the stock's Won85,800 underlying close and parity to the ADR's $18.9375 close.
Pricing negotiations are expected to be completed within the next few hours, at which point the company will either: complete the ADR in full: sell down a partial stake to investors and a partial stake back to Posco; or sell the whole sale back to Posco.
Selling a national asset at a lower price to foreign investors than domestic investors are able to buy it locally was the main sticking point last time round. On June 20, the bank baulked at the idea of selling out at $22.125 per ADR, a 3.8% discount to close and at parity to Posco's outstanding ADRs.
This time, the bank looks like it will be able to console itself with a slimmer discount, but will not be happy at only raising $438 million, some $80 million less than it would have previously received. This figure, however, represents a marked improvement on the amount it would have been able to raise last week when the company's ADR dropped to a 12 month low of $17.75.
Since then, the counter has clawed back a fraction of it's losses, closing at $18.9375 on Thursday, up from $18.875 exactly a week ago. Even at these more invigorated trading levels, however, the counter still stands short of KDB's $20 target price and $3 below the level it opted against in June.
Yet the latest sale differs from its predecessor in one crucial respect. Where previously, a 10% ADR premium to spot fell apart because investors heavily shorted the ADR, this time round the premium has disappeared because of a stronger performance by the domestic share price, which has risen from Won82,000 up to Won85,800 over the past week.
Less shorting activity has been reported, because investors cannot be sure of getting their allocations covered. Should KDB decide to forsake the offering for a third time, it has the option of selling back the shares to Posco itself.
Many local bankers argue that this would be the best solution for all concerned. As one puts it, "Posco is a relatively cash rich, under-leveraged company. It would make perfect sense for it to buy its own shares at these depressed levels."
Posco's completion will be rapidly followed by the sale of a 5.1% stake in Kepco (Korea Electric Power Corporation). With Deutsche Bank, LG Securities and UBS Warburg as global co-ordinators, the government restructuring agency will begin roadshows for a five year exchangeable bond sale in Hong Kong and Singapore today.
The Singapore team will then move to the US and the Hong Kong team to Europe, before final pricing next Thursday (October 5). Indicative terms which are scheduled to be announced later today, have also been modified over the course of the week to meet investor concerns in an increasingly difficult market environment.
They are now expected to comprise a $850 million issue amount and $150 million greenshoe. The coupon has been narrowed to a 2.25% to 2.5% range, the exchange premium to a 20% and 25% range and the yield-to-put to a 70bp to120bp range over Treasuries. Previously, terms were thought to comprise a 1% to 3% coupon, 20% to 30% exchange premium to the company's common shares and a yield-to-put of 50bp to 120bp over Treasuries.
As a further comfort to investors, a put option has also been introduced into the structure at year three. There will also be hard no call for three years subject to the 140% hurdle. Bankers conclude that the new terms further strengthen a bond floor that will now stand at about 96.4.