Korea / Special Sits, Pairs, Index Rebalancing, Clepsydra Capital

Sanghyun Park

Korea / Special Sits, Pairs, Index Rebalancing

Clepsydra Capital

Investigate special situations, pairs, and index rebalancing trades in Korea.

Event-Driven

<ul>
<li>KOSDAQ 150's passive outflow occurs on December 14th for Celltrion Healthcare, whereas it would be January 11th for Celltrion with KOSPI 200.</li>
<li>The estimated passive flow size (x ADTV) on their respective rebalancing trading days is anticipated to be approximately -2.79x (Celltrion Healthcare) and +1.76x (Celltrion).</li>
<li>We should monitor the potential expansion of the swap spread on December 14th. Additionally, contemplating an outright approach for Celltrion, akin to the Hanwha Ocean scenario, could be worth considering.</li>
</ul>


KOSDAQ 150's passive outflow occurs on December 14th for Celltrion Healthcare, whereas it would be January 11th for Celltrion with KOSPI 200.
The estimated passive flow size (x ADTV) on their respective rebalancing trading days is anticipated to be approximately -2.79x (Celltrion Healthcare) and +1.76x (Celltrion).
We should monitor the potential expansion of the swap spread on December 14th. Additionally, contemplating an outright approach for Celltrion, akin to the Hanwha Ocean scenario, could be worth considering.


Spread Trade Opportunities Arising from KQ150/KS200 Passive Flows in the Celltrion Merger

<ul>
<li>The day the basis spread disappears is this Friday, the 24th of November. This mirrors a comparable pattern observed during Korean Air's rights offering in 2020.</li>
<li>If the spot price does not fall below the futures price of our entry until this Friday, we could potentially be in a profitable range.</li>
<li>There has been a notable pattern where the spread continues to exist until just before the moment when new share selling becomes feasible.</li>
</ul>


The day the basis spread disappears is this Friday, the 24th of November. This mirrors a comparable pattern observed during Korean Air's rights offering in 2020.
If the spot price does not fall below the futures price of our entry until this Friday, we could potentially be in a profitable range.
There has been a notable pattern where the spread continues to exist until just before the moment when new share selling becomes feasible.


What Should We Do About the Futures Basis Spread Caused by Hanwha Ocean's Rights Offering?

<ul>
<li>Futures backwardation resulting from the short selling ban will persist. Also, the contraction of market making will lead to more widespread and frequent occurrences of extreme spreads.</li>
<li>The straightforward sell arbitrage (reverse cash and carry) is no longer viable. We must pay attention to the emergence of new price and trading patterns driven by these market conditions.</li>
<li>One potential pattern is the possibility of spot buying centered around those that exhibited extreme spreads at expiration. This has already been observed to some extent in this month's expiration.</li>
</ul>


Futures backwardation resulting from the short selling ban will persist. Also, the contraction of market making will lead to more widespread and frequent occurrences of extreme spreads.
The straightforward sell arbitrage (reverse cash and carry) is no longer viable. We must pay attention to the emergence of new price and trading patterns driven by these market conditions.
One potential pattern is the possibility of spot buying centered around those that exhibited extreme spreads at expiration. This has already been observed to some extent in this month's expiration.


Understanding Extreme SSF Spreads in Korea & Trading Approaches

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

<ul>
<li>Hanwha Ocean's share price declined by 5% today, mainly due to local media reports about a potential capital raise of nearly 2 trillion won to 2.5 trillion won. </li>
<li>Although the company has not officially announced a rights offering, we believe the probability of Hanwha Ocean announcing a major rights offering is relatively high in the next 3-6 months. </li>
<li>We estimate this probability range is closer to about 60-70%. The company needs additional capital to improve its highly leveraged balance sheet and to make major investments. </li>
</ul>


Hanwha Ocean's share price declined by 5% today, mainly due to local media reports about a potential capital raise of nearly 2 trillion won to 2.5 trillion won. 
Although the company has not officially announced a rights offering, we believe the probability of Hanwha Ocean announcing a major rights offering is relatively high in the next 3-6 months. 
We estimate this probability range is closer to about 60-70%. The company needs additional capital to improve its highly leveraged balance sheet and to make major investments. 


Hanwha Ocean: Potential Capital Raise of Nearly 2 Trillion Won

<ul>
<li>First, we can take on some risk and build up a short position using SSFs from now, aiming for an aggressively low price (likely Day 1) during the rights trading. </li>
<li>If this approach seems somewhat risky, the second is to wait until the rights trading and, although accepting some sacrifice in the spread, build positions relatively risk-free. </li>
<li>We can also actively build up a long position in the significantly backwardated SSFs from now and, instead, set up an aggressive short on the underlying shares.</li>
</ul>


First, we can take on some risk and build up a short position using SSFs from now, aiming for an aggressively low price (likely Day 1) during the rights trading. 
If this approach seems somewhat risky, the second is to wait until the rights trading and, although accepting some sacrifice in the spread, build positions relatively risk-free. 
We can also actively build up a long position in the significantly backwardated SSFs from now and, instead, set up an aggressive short on the underlying shares.


Trading Angles Using Severely Backwardated Hanwha Ocean's SSFs Ahead of the Rights Trading

South Korea

Hanwha Ocean Co., Ltd. operates as a shipbuilding and offshore company. The Company provides floating structure construction, steel wire drying, commercial vessels, specialty vessels, gas carrier, tanker, containership, ro ro, bulk carrier, submarine, warship, auxiliaries, cruise ships, and ferries manufacturing services. Hanwha Ocean also offers onshore plants services.

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Hanwha Ocean (042660 KS)

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