MKIF is the first ever infrastructure fund to list in Korea and could still become the second Korean company this year to raise more than $1 billion in the primary equity market (after Lotte ShoppingÆs $3.54 billion) if it exercises the 15% greenshoe in full. That would boost total proceeds to W1.08 trillion ($1.11 billion).
Macquarie Securities and Merrill Lynch were joint arrangers for the deal, which was marketed in a price range of W6,800 to W8,250. ABN Amro Rothschild and Morgan Stanley acted as co-lead managers.
After a tentative start, the international portion of the offer attracted a number of high-quality funds in the final days of the global road show, but the valuation was kept down because there was ôquite a bit of price sensitivityö in the book, a source familiar with the issue said.
When the deal closed on Monday (March 6) the international tranche had attracted about 100 investors and was said to be more than two times covered. Around 60% of the order amount was from Asia, 30% from the UK and continental Europe and the remaining 10% from the US.
ôInternational investors liked the exposure to Korea and they also liked the fact that it is a very focused fund,ö one observer said.
Most of the Asian investors were based in Hong Kong, where these types of market-traded funds have grown in popularity since the listing of three real estate investment trusts (Reits) late last year. And contrary to the Singapore market, where investors are starting to show signs of fatigue with such funds, there are no infrastructure-related funds listed in Hong Kong.
To accommodate the interest from high-quality funds, the underwriters increased the size of the international offering to 77% of the total from an initial 71%. However, the number of primary shares was cut slightly to 71.4 million from 73.5 million, which reduced the overall size of the deal.
The rest of the shares were offered to domestic institutional and retail investors through Good Morning Shinhan Securities, Macquarie and Samsung Securities.
MKIF sold a total of 134.6 million shares, which will account for 43% of the market capitalization at the time of listing. Of the total, 53% were primary shares and 47% secondary shares provided by four existing shareholders. The international portion of the offer was sold in the form of Global Depositary Shares that were priced at $7.192 apiece. Each GDS is equal to one common share.
The low-end issue price will result in a yield of 5.7% for the 8.5 months that are left of this year, based on a guaranteed distribution of at least W400 per unit in 2006. This compares with a local stock market average annual dividend yield of 2.2%, and a yield of just over 4% for most international infrastructure funds. The fund was marketed at a yield range between 4.8% and 5.9%.
Investors were said to have wanted a higher first-year yield to compensate for the fee structure, which includes a performance fee to the manager that will effectively lower the potential distribution to shareholders. The fee will equal 20% of any quarterly return on the shares above 8%.
The issue price values the fund at a 9-18% discount to its net present value, depending on which pre-deal research report one relies upon. Other listed infrastructure funds tend to trade at a discount of 10-15%.
The MKIF management held about 80 one-on-one meetings with investors during the road show, which took them to Hong Kong, Singapore, Abu Dhabi, the UK and both the east and west cost of the United States.
There was also a big marketing effort in Korea to make sure investors understood this new asset class. Aside from a number of analyst briefings, the company met with 34 potential Korean investors on a one-on-one basis.
ôMany domestic investors initially regarded the fund as a fixed-income instrument, while really it is a growth story with some yield support,ö one observer said.
The growth will come as projects in the portfolio currently under construction become operational and through investments into new infrastructure projects. Syndicate research also noted the potential for improved returns through more efficient capital management.
Meanwhile, the steady income from the fundÆs toll roads û which will form the base of its future dividend payments - is expected to increase gradually due to higher tolls and the overall growth in the Korean economy. Government-guaranteed revenue under its concession agreements, which currently account for about 80% of the valuation of the fund, is expected to grow at an average inflation-adjusted compound annual growth rate of 7.6% until 2015, according to syndicate research.
MKIF has invested, or made commitments to invest, more than W1.9 trillion ($1.94 billion) in 14 assets, consisting of 13 toll roads or tunnels and one railway. It is also assessing another six projects, which it may close in the coming six months, including four expressways, one bridge and part of Busan New Port.
The Government Employees Pension Fund, which was the largest shareholder prior to the IPO, reduced its stake to 5.6% from 22.1%, while Korea Teachers Pension trimmed its holdings to 2.4% from 9.6%.
The other two sellers were Kyobo Life Insurance, which had a pre-IPO stake of 7.2%, and Dongbu Life Insurance, which had 3.2%.
The Shinhan Group, which held a combined 15% of the fund before the offer, and Macquarie International Holdings, which had a 5.1% stake, didnÆt sell, but will see their holdings diluted slightly due to the issuance of new shares.
Both of them will be subject to a 12-month lock-up due to their role as the manager of the fund through their 50-50 joint venture Macquarie Shinhan Infrastructure Asset Management Co.
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