Hyundai Motors capital structure arbitrage continued
Yesterday, I posted some first thoughts about a potential Hyundai Capital Structure arbitrage.
I know (through Thomtrader) that it is possible to buy the pref shares, but the short side for the commons is more difficult.
As mentioned, there are traded single stock equity futures on the Korean Stock exchange, but I think it might be difficult for private investors to find a broker who offers this access. I didn’t find any Hyundai Motors CFDs, so shorting through CFDs doesn’t seem to be feasable either.
Interestingly, it seems that one can short the Hyundai Motor’s US ADRs (Ticker HYMTF). At least under this link one can see current short interest in Hyundai ADRs. It seems that the ADR is thinly traded (30k USD volume per day) in the US, but this might be the only possibility.
As I don’t have a US brokerage account, it would be interesting to hear if one could short this e.g. through Interactive brokers.
Some more details regarding the 3 different series of preferrence shares from the Hyundai IR page:
2. Characteristics of Preferred shares and Possibility of conversion of preferred share to common share The series 1 preferred shares pay dividends in cash in the amount which is the sum of 1% per annum of par value which is ￦5,000 and the amount of dividends declared on the common shares. The series 2 preferred share pay dividends as declared by the Board of Directors which may not be less than 2% per annum of par value. The series 3 preferred shares pay dividens as declared by the Board of Directors which may not be less than 1% per annum of par value. The option for conversion of preferred share to common share is not included in the series 1, 2 and 3 preferred share.
So the mnimum Dividend is either 50 KRW or 100 KRW or ~0.1 % based on the market prices. From this description, it looks like only series one is directly linked to the common share dividend. However in practice, they pay the same dividend (adjusted for the minimum) as the following table for dividends since 2000 shows:
|Common||Series I||Series II||Series III|
However I have still no idea, why the class 3 shares are trading so much lower then the other two series. This is something I need to explore further.
Finally a quick view at the spread of the class 3 shares to common shares, the spread is at an all time high now:
One final comment with regard to the common shares: On an absolute basis, Hyundai Motors does not look expensive (P/E 11, P/B 1.7), however current profitablity is far beyond historical averages (14% net income margin against 7% on average). So if one believes in reversion to the mean for a cyclical industry like cars, the common shares have around -50% downside from here.