Few would have thought that a $200 million GDR for one of Korea's most highly regarded equity stories could have presented lead managers Goldman Sachs and Salomon Smith Barney with one of the tougher execution challenges of the year.
Yet the two banks were hit with a double whammy, as an outperforming stock provoked increasing investor price sensitivity throughout roadshows, while the order book could have easily unraveled after the Korean stock market suddenly posted its biggest drop of the year in the final hours ahead of pricing yesterday. The Kospi closed down 4.7% on Thursday as the market came to terms with a realisation that Hynix's creditor banks may have negotiated themselves a poor deal with Micron and corporate governance concerns were raised at the LG Chemical group.
KorAm itself fell 6.3% to close at Won13,400, but this partly enabled the leads to complete the new share offering at a slim 2.99% discount to spot. A total of 22 million units (including the greenshoe) were priced at $9.9365 raising $218.6 million (again including greenshoe). Joint lead manager was Samsung Securities with Credit Suisse First Boston as co-lead.
Prior to the market's sudden downturn, the book had closed two times oversubscribed and having re-canvassed every single investor for new pricing levels, the final book came in 1.5 times over. About 100 investors participated, with a rough geographical split of 60% US, 25% Europe and 15% Asia.
The slim discount must have been relatively satisfying for the Carlyle consortium which owns the bank and has consistently set it ambitious targets since taking over in late 2000. Pricing also represents the tightest discount to spot since Samsung Electronics' 0.86% level in 1997. Indeed, although Korea Tobacco & Ginseng priced its GDR at parity to the underlying last autumn, some argue that it should be discounted since the stock is not fully open to foreign investment.
Viewed over a longer timeframe, KorAm's pricing also becomes more aggressive. Using a 30-day average, for example, the deal has come at a 2% premium and on a 20-day average, a 1.4% premium.
Year-to-date, KorAm has had a strong rally, climbing 19.67% prior to Thursday's fall. Since the deal began pre-marketing on April 1, it has also outperformed the Kospi by 11.51% and the Korean banking index by 4.25%.
"I think the most satisfying aspect of this deal is that pricing was achieved at such a slim discount despite the fact that the stock had run up so much," one observer concludes.
That it has done so has partly been attributed to M&A fever and partly to a successful re-positioning of the stock by the leads over the course of roadshows. While there has been no fresh news regarding a sale since investor pre-marketing began, the Carlyle group has made no secret of its desire to sell at the right price. Currently owning 40.5% of the bank, the consortium has been diluted to 36.5% as a result of the new share deal, which increases the bank's equity float by 12%.
However, the deal was also pitched on the basis that the stock still had upside potential even if a take-out does not occur over the short or medium-term. Lead bankers successfully argued that the banking sector should not be valued on a pure price to book basis since none of KorAm's competitors have taken the same aggressive steps to clean up their balance sheets. Viewing KorAm on a price to book value net of NPLs cheapens the stock by some margin.
On a fundamentals basis, KorAm is the cleanest bank in Korea reporting a loan loss ratio of 95.5% against an industry average of 75%. It has also balanced its aggressive mine sweeping with a concerted push into high-end consumer banking and SME lending.
As a result of GDR, KorAm has also bought its capital ratios up to the standards of the world's better-managed banks. Bankers conclude that the new offering will push the bank's overall CAR just north of 12% from 11.2% pre-offering. As a result, tier 1 capital should also rise from 6% to just under 7%.