SKT monetizes treasury shares

Korean telecom operator completes $329.5 million convertible

SK Telecom completed a convertible on Friday in order to make good its promise to monetize a portion of Treasury shares created by a previous share swap with Korea Telecom. Credit Suisse First Boston and Lehman Brothers were lead managers of the deal, which was timed to take advantage of a 3% spike in the company's share price in the trading day before launch.

The convertible has a five-year final maturity and was priced at par with a zero coupon, three-year put at 103.809% and redemption price of 106.429% to yield 1.25%.

Final pricing came towards the more aggressive end of a yield range between 1.125% and 1.625%. The conversion premium was marketed between 23% and 28% and priced at 25% to the stock's Won188,500 close. Year-to-date, the stock is down 5.28%.

There is also three-year hard no call, thereafter subject to a 130% hurdle.

Underlying assumptions comprise a bond floor of 91.1%, theoretical value of 100.1% and implied volatility of 29.9%. This is based on a credit spread of 85bp over Libor, 1% dividend pass through, 5% borrow cost and 30% volatility assumption. The high borrow cost reflects the fact that while borrow is available through the ADR, there is none against the common stock, which backs the deal.

Compared to the kind of pricing levels achieved by other Asian CB's so far this year, a yield of 1.25% seems fairly generous for an A-/A3 rated credit. However, Treasury yields have moved more than 100bp over the past two months, ending the days of negative yield structures.

SKT's convertible is also the first equity-linked deal to test a market where investors have become far more risk adverse. Many have also been badly burnt by the terrible secondary market performance of the recent string of Indian CB's. These are all now trading 10 to 15 points below par.

SKT's previous deal of July 2002 provided yet another hurdle for the new offering since it has been one of the worst performers of the outstanding Korean universe and is still trading either side of par. The $1.25 billion transaction represented an exchangeable between SK Corp and SK Telecom.

Carrying a BBB-/Baa3 rating, the deal had a 2.5% coupon, 26% exchange premium to a spot close of Won238,500 and a three-year put at par. Underlying terms at pricing comprised a bond floor of 92.6%, implied vol of 23% and theoretical value of 106%. This was based on a credit spread of 185bp, 0% dividend, 1.5% borrow cost and 35% vol assumption.

Today the deal has a 38.5% premium and yields 2.498%. The new deal has slightly more expensive volatility than the old, which is currently trading at 28.8%.

Specialists emphasise that SKT wanted to complete a deal that did not push the market too far since there are likely to be more to follow. The current transaction monetizes 2% in Treasury shares. About 7% of the SKT's total issued share capital is currently in the form of Treasury shares and the company has pledged to return the equity value back to shareholders.

However, this is complicated by the fact that the stock is already at its 49% foreign shareholding limit. Should the government lift the foreign shareholding limit (as expected), investors will be able to convert into ordinary shares. If this does not happen, the convertible will redeem for cash.

Proceeds from the deal will either be used to buy-back common shares, or issue a special dividend that should lift the company's dividend yield from about 3.5% to 5% (based on a 25% pay-out ratio).

The convertible was launched a couple of hours after Korea's close on Friday and closed 5.2 times oversubscribed one-and-a-half hours later. With participation by about 130 accounts, the deal had a split of 60% Europe and 40% Asia.

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