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

Sanghyun Park

I investigate special situations, pairs, and index rebalancing trades in Korea.

Korea / Special Sits, Pairs, Index Rebalancing

Samsung Heavy Situation: Discussing 3 Key Issues at This Point

Samsung Heavy Industries Passive Flow Trade on Relisting, August 10

Untrustworthy Korean Regulators: Short Restrictions Applicable Only from Aug 18 in SHI Rights Offer

Samsung Heavy Rights Offering - How to Approach Trading Period for Subscription Rights

Samsung Heavy Industries: A Capital Reduction Followed by 1 Trillion Won in Rights Offering

Korea's New Short Selling Restriction to Close the Loophole for Arb Trading on a Rights Offer

Clepsydra Capital

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

Event-Driven

<p>Samsung Heavy Industries first announced a 5 to 1 capital reduction. But this one is a par-value capital reduction without any refund. So, the number of outstanding shares remains unchanged. Only the par-value will be down from ₩5,000 to ₩1,000.</p><p>Why doing it now? Well, it had to do it a long time ago. It has already been a while since Samsung Heavy began to run the risk of encountering capital impairment.</p><table class="table table-striped">
<colgroup>
<col width="100">
<col width="100">
<col width="100">
</colgroup>
<tbody>
<tr>
<td style="width: 227.273px;" data-sheets-value='{"1":2,"2":"Capital reduction "}'>Capital reduction details</td>
<td style="text-align: right; width: 227.273px;" data-sheets-value='{"1":2,"2":"Current"}'>Current</td>
<td style="text-align: right; width: 227.273px;" data-sheets-value='{"1":2,"2":"After capital reduction"}'>After capital reduction</td>
</tr>
<tr>
<td style="width: 227.273px;" data-sheets-value='{"1":2,"2":"Ordinary shares"}'><strong>Ordinary shares</strong></td>
<td style="text-align: right; width: 227.273px;" data-sheets-value='{"1":3,"3":630000000}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}'><strong>630,000,000</strong></td>
<td style="text-align: right; width: 227.273px;" data-sheets-value='{"1":3,"3":630000000}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}'><strong>630,000,000</strong></td>
</tr>
<tr>
<td style="width: 227.273px;" data-sheets-value='{"1":2,"2":"Par value"}'><strong>Par value</strong></td>
<td style="text-align: right; width: 227.273px;" data-sheets-value='{"1":3,"3":5000}' data-sheets-numberformat='{"1":4,"2":"[$₩]#,##0","3":1}'><strong>₩5,000</strong></td>
<td style="text-align: right; width: 227.273px;" data-sheets-value='{"1":3,"3":1000}' data-sheets-numberformat='{"1":4,"2":"[$₩]#,##0","3":1}'><strong>₩1,000</strong></td>
</tr>
<tr>
<td style="width: 227.273px;" data-sheets-value='{"1":2,"2":"Capital"}'><strong>Capital</strong></td>
<td style="text-align: right; width: 227.273px;" data-sheets-value='{"1":3,"3":3150.574225}' data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-formula="=R[2]C[-3]/1000000000"><strong>3,150.6</strong></td>
<td style="text-align: right; width: 227.273px;" data-sheets-value='{"1":3,"3":630.114845}' data-sheets-numberformat='{"1":2,"2":"#,##0.0"}' data-sheets-formula="=R[2]C[-3]/1000000000"><strong>630.1</strong></td>
</tr>
<tr>
<td style="width: 227.273px;" data-sheets-value='{"1":2,"2":"Record date"}'>Record date</td>
<td colspan="2" style="text-align: right; width: 475.455px;" data-sheets-value='{"1":3,"3":44403}' data-sheets-numberformat='{"1":5,"2":"yyyy. mm. dd","3":1}'>2021. 07. 26</td>
</tr>
<tr>
<td style="width: 227.273px;" data-sheets-value='{"1":2,"2":"Shareholder meeting"}'>Shareholder meeting</td>
<td colspan="2" style="text-align: right; width: 475.455px;" data-sheets-value='{"1":3,"3":44369}' data-sheets-numberformat='{"1":5,"2":"yyyy. mm. dd","3":1}'>2021. 06. 22</td>
</tr>
<tr>
<td style="width: 227.273px;" data-sheets-value='{"1":2,"2":"Trade suspension"}'><strong>Trade suspension</strong></td>
<td colspan="2" style="text-align: right; width: 475.455px;" data-sheets-value='{"1":2,"2":"2021. 07. 23 ~ 08. 09"}'><strong>2021. 07. 23 ~ 08. 09</strong></td>
</tr>
<tr><td colspan="3" style="width: 723.636px;">Source: DART</td></tr>
</tbody>
</table><hr><p><strong>What's really important is what follows this capital reduction. </strong><strong>Samsung Heavy also made a preannouncement of a ₩1T new share issuance.</strong></p><p>Samsung Heavy will have a shareholder meeting on June 22 to increase the total allowable shares to be issued. A ₩1T new share issuance would see a 22% capital increase at the last close, requiring an increase in the total allowable shares to be issued. This needs shareholder approval. So, we will see the final fixation of offering details after June 22. A new share issuance itself requires only board approval.</p><table class="table table-striped">
<colgroup>
<col width="100">
<col width="100">
<col width="100">
</colgroup>
<tbody>
<tr>
<td data-sheets-value='{"1":2,"2":"Share structure"}'>Share structure</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Ordinary"}'>Ordinary shares</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Preferred"}'>Preferred shares</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Total allowable shares to be issued"}'><strong>Total allowable shares to be issued</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":740000000}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}'><strong>740,000,000</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":60000000}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}'><strong>60,000,000</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Shares outstanding"}'><strong>Shares outstanding</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":630000000}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}'><strong>630,000,000</strong></td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":114845}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}'><strong>114,845</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Treasury shares"}'>Treasury shares</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":25964429}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}'>25,964,429</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"-"}'>-</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Float shares"}'>Float shares</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":604035571}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}'>604,035,571</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":114845}' data-sheets-numberformat='{"1":2,"2":"#,##0","3":1}'>114,845</td>
</tr>
<tr><td colspan="3" rowspan="1" data-sheets-value='{"1":2,"2":"Source: DART"}'>Source: DART</td></tr>
</tbody>
</table><p>What's unusual is the preannouncement. Why preannounces it for an offering taking place more than a month later? Of course, it is not like we've never seen it before. Hyundai Heavy Industries Intermediate Holdco (now Korea Shipbuilding &amp; Offshore Engn Co Ltd) made a preannouncement of rights offering back in 2019. But that was part of a group-wide complex restructuring process, which should have been made public in advance.</p><p>This is a stand-alone offering event. I don't really see why Samsung Heavy should disclose it in advance through a preannouncement.</p><p>My suspicion? I think it is related to the recently enacted short-selling restriction to close the loophole for arb trading in a rights offer. Those having shorted between a day after an offering announcement day and an offering price-fixing day face the restriction. In such a case, they are prevented from participating in an offering at all. The restrictions apply to offering events whose filing dates are after April 6, 2021.</p><div>
<table class="table table-striped">
<colgroup>
<col width="100">
<col width="100">
</colgroup>
<tbody>
<tr><td colspan="2" data-sheets-value='{"1":2,"2":"Country"}'>Restriction detail</td></tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Target"}'><strong>Target</strong></td>
<td data-sheets-value='{"1":2,"2":"Those having shorted between an offering announcement day+1D and an offering price fixing day"}'><strong>Those having shorted between the trading day following an offering announcement day and an offering price-fixing day</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Restriction"}'><strong>Restriction</strong></td>
<td data-sheets-value='{"1":2,"2":"Prohibits participating in an offering"}'><strong>Prohibits participating in an offering</strong></td>
</tr>
<tr>
<td>Effective date</td>
<td>April 6, 2021</td>
</tr>
<tr><td colspan="2" data-sheets-value='{"1":2,"2":"Source: Korea FSC"}'>Source: Korea FSC</td></tr>
</tbody>
</table>
<p>Then, the question is whether this preannouncement qualifies as an offering announcement subject to the short-selling restrictions. I don't think it is since the Korea FSC states that an offering announcement contains a detailed schedule. This preannouncement has only an estimated offering value.</p>
<p>Samsung Heavy Industries isn't exactly a fancy growth stock. It is evident that liquidity-wise, this offering needs as many arb traders as possible. So, the company may have figured a way to walk around the short-selling restrictions so that it could invite more arb traders. It is like giving more than plenty of time (6 weeks) to short before an offering announcement and recover at a deep discount in an offering.</p>
</div>

Samsung Heavy Industries first announced a 5 to 1 capital reduction. But this one is a par-value capital reduction without any refund. So, the number of outstanding shares remains unchanged. Only the par-value will be down from ₩5,000 to ₩1,000.Why doing it now? Well, it had to do it a long time ago. It has already been a while since Samsung Heavy began to run the risk of encountering capital impairment.







Capital reduction details
Current
After capital reduction


Ordinary shares
630,000,000
630,000,000


Par value
₩5,000
₩1,000


Capital
3,150.6
630.1


Record date
2021. 07. 26


Shareholder meeting
2021. 06. 22


Trade suspension
2021. 07. 23 ~ 08. 09

Source: DART

What's really important is what follows this capital reduction. Samsung Heavy also made a preannouncement of a ₩1T new share issuance.Samsung Heavy will have a shareholder meeting on June 22 to increase the total allowable shares to be issued. A ₩1T new share issuance would see a 22% capital increase at the last close, requiring an increase in the total allowable shares to be issued. This needs shareholder approval. So, we will see the final fixation of offering details after June 22. A new share issuance itself requires only board approval.







Share structure
Ordinary shares
Preferred shares


Total allowable shares to be issued
740,000,000
60,000,000


Shares outstanding
630,000,000
114,845


Treasury shares
25,964,429
-


Float shares
604,035,571
114,845

Source: DART

What's unusual is the preannouncement. Why preannounces it for an offering taking place more than a month later? Of course, it is not like we've never seen it before. Hyundai Heavy Industries Intermediate Holdco (now Korea Shipbuilding &amp; Offshore Engn Co Ltd) made a preannouncement of rights offering back in 2019. But that was part of a group-wide complex restructuring process, which should have been made public in advance.This is a stand-alone offering event. I don't really see why Samsung Heavy should disclose it in advance through a preannouncement.My suspicion? I think it is related to the recently enacted short-selling restriction to close the loophole for arb trading in a rights offer. Those having shorted between a day after an offering announcement day and an offering price-fixing day face the restriction. In such a case, they are prevented from participating in an offering at all. The restrictions apply to offering events whose filing dates are after April 6, 2021.






Restriction detail

Target
Those having shorted between the trading day following an offering announcement day and an offering price-fixing day


Restriction
Prohibits participating in an offering


Effective date
April 6, 2021

Source: Korea FSC


Then, the question is whether this preannouncement qualifies as an offering announcement subject to the short-selling restrictions. I don't think it is since the Korea FSC states that an offering announcement contains a detailed schedule. This preannouncement has only an estimated offering value.
Samsung Heavy Industries isn't exactly a fancy growth stock. It is evident that liquidity-wise, this offering needs as many arb traders as possible. So, the company may have figured a way to walk around the short-selling restrictions so that it could invite more arb traders. It is like giving more than plenty of time (6 weeks) to short before an offering announcement and recover at a deep discount in an offering.


Samsung Heavy's Unusual Preannouncement of Rights Offer: Pave the Path for Massive Arb Trades?