MBK fixes ING Life IPO pricing at bottom end

An unfavoured sector, unsettled markets and nearly three weeks of secondary market trading risk conspire to push pricing towards the bottom of the private equity firm’s expectations.

Asian private equity firm, MBK Partners, has begun its exit of ING Life Korea after pricing a 33.5 million secondary share deal at W33,000 per share, towards the bottom end of its indicative range.

The group raised W1.1 trillion ($970 million) from the deal, which equals 40.9% of the insurer’s issued share capital. At this level, it has come 17.64% through its W31,500 to W40,000 indicative range and on a valuation of 0.53 times 2016 embedded value (EV).

This represents a sizeable 24.3% discount to market leader Samsung Life, which was trading around the 0.7 times level on Monday and an 11% discount to Hanwha Life.

Syndicate analysts believe ING Life should trade at a premium to Samsung Life given its strong risk-based capital (RBC) ratios, which mean it will not need to raise funds to implement global Solvency II and IFRS 17 accounting standards unlike the rest of the domestic industry.

On the surface, this points towards strong secondary market upside. However, the Korean life insurance sector has long been out of favour and been underperforming the rest of the market for well over a year thanks to legacy issues surrounding high guarantee products.

The institutional order book, nevertheless, closed 3.7 times covered, although this ratio will fall to about three times once the employee share option placement (ESOP) closes and is scaled back from an initial 20% allocation. Retail investors will be allocated another 20% of the total and institutional investors the remainder.

Bankers said there were about 200 investors in the final order book, with the top 10 accounts taking 50% of the institutional deal. Roughly 80% of these top 10 accounts were foreign.

They also said the deal could have been comfortably priced around the W35,000 mark, at the highest end of revised guidance between W33,000 and W35,000.

However, they decided to err on the side of caution given investors will need to bear almost three weeks of market risk before the deal begins trading on May 11. Global markets have also recently been unsettled by geopolitical risks surrounding the French presidential elections and North Korean missile tests, although the Kospi has sailed through both.

Korea’s benchmark index has been on a rising trend since April 11 and closed Monday at 2,173.74, up 7.27% year-to-date. Likewise, Samsung Life and Hanwha Life have been on a rising trend over the same period, although they remain down year-to-date: -2.22% for Samsung and -5.36% for Hanwha.

By contrast, Tongyang Life and Mirae Asset Life have both been on a declining trend over the past few weeks, indicating there may have been some rotation into ING Life. Tongyang is now down 22.36% year-to-date, while Mirae remains up 8.93%.

Both are trading at a discount to ING Life, on respective 2016 EV multiples of 0.49 and 0.43 times.

They also have inferior dividend yields to ING Life, which has been priced to yield 6.5% compared to a 2% Korean industry average. Samsung Life is trading around 1.6%.

ING Life has been able to offer an enticing yield because of its high RBC ratio, which should soar from 319% at the end of 2016 to 521% under new regulatory standards. MBK has committed to retain a 50% to 60% payout ratio while the group remains under its control.

Syndicate analysts say ING Life Korea is fully capitalised even on a full Solvency II and IFRS 17 basis - unlike Samsung Life and Hanwha Life, which are likely to drop to 89% and 39% based on 2015 stress tests. The whole sector has been loath to raise capital while it is trading below embedded value.

ING Life will come to market with a capitalisation of W2.703 trillion, well above the W1.84 trillion MBK paid for the group in December 2013. The latter is likely to be pleased the deal has passed off smoothly even though it has not quite met the W3 trillion valuation it hoped to achieve through a trade sale last year.

This fell through last summer after the Chinese buyers, which were still in the final round of bidding, became nervous about their government’s hostility to Korea’s proposed deployment of America’s anti-ballistic missile shield, THAAD.

Joint sponsors for the IPO are Morgan Stanley and Samsung Securities, with joint bookrunners comprising Goldman SachsMirae Asset Daewoo and KB Securities


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