Tag Archives: Hyundai Motors Preference shares

Hyundai capital structure arbitrage – final thoughts

Following part 1 and part 2 about my thoughts on a potential Hyundai Motors capital structure arbitrage deal, I wanted to summarize my thoughts and come to a conclusion.

In between, some new information came up:

a) it is possible to trade single stock futures in Korea thorugh Interactive Brokers
b) the mentioned US ADRs are actually ADRs on Hyundai Motor pref shares, so no “cheap” short potential
c) a contact told me that stock borrowing costs for Hyundai Motors common shares in Korea would be about 3-4%

Based on this new information, the relative value trade (short common shares, long pref shares) looks less attractive.

Traditional long-short

In the traditional short with a long position in the pref shares and a short position in the common, the “carry” would be calculated as follows:

Yield long position (3.77%) minus yield short position (0,80%) minus cost stock borrowing (3-4%).

So we would end up in the best case with 0% carry, in the worst case with -1 % carry for the long short position. Negative carry trades are much less attractive because you actually loose if nothing happens. A good carry trades gives you something in case nothing happens (“positive cary”) plus upside to compensate against the potential unlimited risk from the short position.

Long pref / short future

The problem with the long pref and short future strategy is that one has to fully fund the long position as the short future does not provide funding. So the overall potential return on investment is much lower than a fully funded long short trade. Only if you believe that the pref shares could close the valuation gap dramatically you would get an interesting return out of this strategy. However I do not have any view on this.

So to summarize this: based on current dividend yields and and stock borrowing costs, the long-short trade does not look too attractive as it doesn’t provide a positive carry. The long pref / short future trade might not be worth the effort too implement it as the upside potential is relatively limited and now real catalyst is on the horizon.

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.
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German Preference share spreads & Hyundai Motor capital structure arbitrage

Last year, I had a couple of posts about preference shares in general (part 1 and part 2) and spreads between German common shares and pref shares in particular (here).

II looked at a post of Valuation Guru Damodaran, who tries to come up with a theory of explaining the spreads between votung an non-voting shares.

Among other factors, his assumption is that shares with voting rights should generally trade at a premium and c.p. the premium should be higher for badly managed companies where a change of control event is likely.

When we looked at German pref shares, we could see that in certain cases this held up but not in general.

How do spreads look right now ? Let’s look at current spreads from quoted German companies with both, common and pref shares compared to last July:

Company VZ ST Current spread old Delta
MINERALBRU UEBERKING-TEINACH 6.81 12.04 76.8% 100.0% -23.2%
METRO AG 27.43 29.64 8.1% 52.4% -44.4%
MAN SE 60.1 83.52 39.0% 47.3% -8.4%
BAYERISCHE MOTOREN WERKE AG 44.85 69.04 53.9% 46.9% 7.0%
SIXT AG 13.24 15.63 18.1% 27.3% -9.3%
FRESENIUS MEDICAL CARE AG & 44.9 54.71 21.8% 17.4% 4.5%
EUROKAI KGAA 20.35 25.542 25.5% 15.5% 10.0%
WMF*WUERTTEMEB METALLW-AKT 29.2 32.5 11.3% 7.1% 4.2%
SARTORIUS AG 39.84 36.083 -9.4% -1.9% -7.5%
RWE AG 30.565 32.605 6.7% 7.3% -0.6%
DYCKERHOFF AG 31.77 30.01 -5.5% 4.1% -9.6%
BIOTEST AG 38 39.51 4.0% 3.3% 0.7%
AHLERS AG 10.401 9.86 -5.2% -0.5% -4.7%
EFFECTEN-SPIEGEL AG 12.29 12.749 3.7% 1.4% 2.3%
KSB AG 442.05 483.1 9.3% -1.4% 10.7%
HUGO BOSS AG -ORD 76.01 68.02 -10.5% -9.2% -1.3%
VOLKSWAGEN AG 142.6 127.6 -10.5% -9.2% -1.3%
FUCHS PETROLUB AG 38.075 34.29 -9.9% -13.1% 3.2%
HENKEL AG & CO KGAA 47.31 40.1 -15.2% -17.4% 2.2%
DRAEGERWERK AG 70.66 53.58 -24.2% -21.2% -2.9%

Most interesting is the developement at Metro, where spreads between prefs and common shares almost disappeared. The most prominent example against Damodaran’s theory, BMW (well managed, no chance of change in control) even increased it’s spread.

If we look at BMW again, we can see that after a some tightening, the spread is almost back to it’s peak:

Personally, I don’t really understand this. Of course liquidity is better for the common shares and they are in the DAX, but a 50% higher valuation for the common shares with a controlling shareholder family who does not want to sell doesn’t make sense.

Another intersting idea from Thomtrader are Hyundai Motors pref shares.

Hyundai pref shares (3 different series) trade at around 48-60 k Won against 220 k for the regular shares. That is a ratio of ~4-5:1, a massive discount. Again, this can not be explained through “conventional wisdom”.

If we look at the historical spread between the pref shares and the common Hyundai Motor shares, we can see that historically they were correlated quite well but are now diverging since the last couple of months:

Although I do not want to own them outright, a long Hyundai Pref short common shares trade looks interesting. One could buy 4 Pref shares and short (I don’t know if this is possible in reality) 1 common share.

Historical correlation is around 0.85, not perfect but Ok. The nice thing is that we have a good carry of ~ 3 pref dividends, which translates into a “carry” of around 7% for the nominal position (in hedgefund lingo) before borrowing costs, non-frefundable taxes etc..

Again the “Volkswagen” risk of shorting common shares should be relatively small as it is yet to be proved that anyone can take over a Korean Company.

This is a trade I am actually considering is another “capital structure” trade similar to the Draegerwerke long/short.

UPDATE: I just saw that there are single stock futures traded in Korea. I am not sure if a private investor can trade this but as an institutional invetsor, this should be possible.