Unicredit rights issue watch & correlations & some research for deeply discounted rights issues
Unicredit:
This is not really a surprise: Today, on the first day the Unicredit rights traded separately (Ticker: UCGAA), the pressure on the stock continued.
The theoretical price of the right at the start of the day would have been 1,26 EUR, currently they are trading at ~95 cents, after hitting a low of ~85 cents in the morning. With the share at 2.44 EUR (again -7%), the theoretical price should be (2.44-1.943)*2= =0.994 EUR, so there is only a slight mispricing at the moment.
However, I would not be surpised if the share price will fall further towards the price of the new shares.
Research deeply discounted rights issue
I tried to find some research in general forr deeply discountes issues, however I was not overly succesfull. I found one interesting link here, but couldn’t download the paper.
In principal, deeply discounted rights issues represent a situation with “forced selling”, however the company doing this kind of capital raising is usually in trouble.
I would be great if any reader could send me some links etc. if there is further research available on this topic.
Long / Short trade
A quick correlation analysis (15.12.2010 to 15.12.2011) of Unicredit against some banks and indices shows, that Intesa would indeed be the best fit for a long/short strategy, with a 90% correlation over thath time frame. Interrestingly, the Italian general Index is better correlated than the Euro bank index, so the Italian Index would be a good proxy if the Intesa short wouldn’t work.
| Security | UCG | ISP | FTSEMI | ACA | CBK | SX7P |
|---|---|---|---|---|---|---|
| UCG | 1.00 | 0.90 | 0.88 | 0.74 | 0.66 | 0.83 |
| ISP | 0.90 | 1.00 | 0.90 | 0.76 | 0.71 | 0.87 |
| FTSEMI | 0.88 | 0.90 | 1.00 | 0.80 | 0.73 | 0.93 |
| ACA | 0.74 | 0.76 | 0.80 | 1.00 | 0.70 | 0.87 |
| CBK | 0.66 | 0.71 | 0.73 | 0.70 | 1.00 | 0.78 |
| SX7P | 0.83 | 0.87 | 0.93 | 0.87 | 0.78 | 1.00 |
Under IMIB.IM I found a traded ETF on the FTSE MIB index, I am not sure if one can short this ETF as a private investor.
Edit:
There is an interesting post over at FTAlphaville which tries to explain the renewed pressure with (forced) retail selling:
Tail-swallower and retail investors: Retail investors typically don’t tend to act on rights issue so their custodians generally tend to give them the default option of selling their rights. This selling pressure does not come to the fore until the rights start trading and is typically towards the end of the subscription period. Similarly tail-swallowing means selling enough rights to be able to use the proceeds to exercise the remaining rights in a cash-neutral way. This selling pressure starts with the trading of the rights by definition.
value and opportunity 
Yep, there was high volume in those days, but one should expect price nursing.
In German:
“Ein Konsortium aus 14 Geldhäusern hat die Finanzspritze garantiert. Sollten sich keine Investoren dafür finden, bleiben die Banken zunächst darauf sitzen.”
http://de.reuters.com/article/companiesNews/idDEBEE7AR07120111128
I think price nursing is more an issue if the discount is small. With UCG I woudl rather expect delta hedging (shorting) by the bookrunners.
MMI
You are right with your first sentence, though the discount initially was 66 percent and yesterday we have seen 13 percent.
Shorting would mean that they don’t mind screwing the client.
#weiju,
my impression is that a lot of investors already sold before the subscription rights wereseperated.
mmi
Sometimes (but not this time?) major investors have to exercise their rights because they are hampered by low levels of liquidity in the trade with subscription rights and selling pressure would follow the issue of new shares. Normally(!), price nursing should also be expected.
Concerning the paper, just check your postbox 😉
thanks a lot !!
mmi