OCBC rights issue (Part 1)

I'm always very interested in rights issue.


There's a new kid on the block just announced today. That's for OCBC. They bought into WingHang bank listed in HK, maybe even over paying for it. The big idea is that they can raise the funds for the purchase by doing private placements (Boo!), borrow money and increasing their debts (not too good, in the light of ever increasing capital requirements by central banks worldwide), and issuing rights. I think they are doing a combination of both rights and debt, which is quite a good move.


The terms of the rights issue is as follows:


1. One rights share for every 8 existing ordinary shares. That is, if you own 1000 shares or 1 lot of OCBC shares before XR, you'll be entitled 125 rights shares.


2. Each right shares is at an issue price of $7.65. The price as of 18th Aug 2014 is about $10.20, thus it's being issued at a discount of 25% at $7.65.


3. Based on pre rights price of $10.20, the theoretical ex rights price (TERP) is $9.92. For those interested on how you get it, this is the calculation:

TERP (based on $10.20) = (10.20*8 + 7.65*1) / (8+1) = 9.9167... = $9.92

Again, the TERP is not a price fixed in stone. It's just an estimation of what the price would be after the rights issue, assuming everything (including price) remains the same. So take it as a rough guide that it is, nothing more.


4. A lot of details are not out yet. In fact, the rights exercise haven't even been approved by SGX yet. Most likely it'll go through, but here's the indicative timetable of key events:

Shares XR date: 25th Aug 2014, 9am 

(that means 22nd Aug, THIS Fri 5pm is the last trading day before the shares goes XR on the following Mon!)

Dispatch of Offer Information Statement (OIS) : 1st Sept 2014

Period of trading for nil paid rights: 1st Sept, 9am to 9th Sept, 5pm

Last date for acceptance and payment for excess rights: 15th Sept 2014 (930 pm for ATM applications)

Expected date of issuance of rights shares: 26th Sept 2014

Trading of rights shares as ordinary shares: 29th Sept 2014


The full document is here, for those who want more details other than the salient points mentioned in this post.

Okay, so how to make the best out of the rights issue? Again, I'm assuming the viewpoint of someone who doesn't have any OCBC shares to begin with, and trying to arbitrage on the price difference of the shares before and after rights issue. The rights exercise is quite friendly, because for every 8 shares you own, you'll be entitled to 1 rights shares. And since 1000 shares in one lot is actually divisible by 8, you won't have to resort of funny tricks to avoid getting odd lots.


The problem about capitalising on this particular rights issue is this:


1) we have the trading lot size for SGX reduced from 1000 shares per lot to 100 shares per lot. It's coming soon, so they say. But it's been delayed again and again. It's supposed to come in first quarter of 2014, by look where we are now. If it's reduced to 100 shares per lot, the usual method of maximizing the number of odd lots you get will be rubbished. Firstly, there's less incentives for shareholders to avoid odd lots (those not in multiples of 1000 shares), so there's less chance to arbitrage on it. Secondly, the number of excess rights to round up to round lots will be reduced drastically.


2) 1 for 8 rights exercise is too friendly. You won't get fractional rights shares which are usually discarded. I think the pool of excess rights shares that are not subscribed will be reduced drastically.


3) OCBC is a big cap. 1 lot at current price is a freaking $10,200. I suppose not many people will have more than 1 lot of OCBC shares, don't even talk about multiples of 8 lots. So assuming that a big part of the population owns less than 8 lots of OCBC mother shares, then you always end up with odd lots. Let's say you have 1 lot of OCBC shares, after rights, you'll get 1125 shares of OCBC shares. That's odd lots right? So, if we want to apply for excess rights shares to round to 2000 shares, what's the chances of succeeding when almost everyone out there is doing the same?

It's not going to be high, that's for sure.


Perhaps there's still a way to capitalise on this...but let me clarify my thoughts first.

(Update: Here's the second part of the post - OCBC rights issue (Part 2))