Chillin' out till it needs to be funded
The cat has been out of the bag, but for so long we thought only Singaporean GIC and Temasek or Carlos Slim had problems with their purchases in bank stocks ahead of the crisis. While Temasek/GIC were holding Stanchart in March 2008, just ahead of the fall, it transpires that CIC is struggling with MS shares costing it $48/58 next week ( Aug 17) from convertibles that have been paying it 9p.c. dividend on the $5.6 billion investment since eEcember 2007. The stake in Liverpool that was to be bought from proceeds of a Morgan Stanley stake of CIC, the most active China investment vehicle, was thus contingent on CIC’s ability to get rid of this white elephant and that definitely complicates things for dealmakers involved.
Now the storm has arrived. CIC’s stake in Morgan Stanley is in equity units that, according to terms of the 2007 agreement, must be converted to publicly traded common stock August 17. The conversion is mandatory and a loss – at least on paper – for CIC seems inevitable.
The equity conversion is expected to cost between US$ 48.07 and US$ 57.68 per share at a time when Morgan Stanley stock price is hovering at about US$ 27 a share.
Meanwhile, as a foreign investor, CIC is looking in a rearview mirror at potential pressure from the U.S. government over the size of its stake in Morgan Stanley. This concern factored into the fund’s decision in recent weeks to sell large blocks of Morgan Stanley common stock on the secondary market.
After the equity conversion, CIC’s stake is expected to reach 11.64 percent of the financial holding group, or 171.6 million shares.
CIC anyway has to sell at least a fifth of its stake as the US treasury has in December 2008 rules limited discretionary investment to 10% of a company’s ownership. Till now CIC has sold more than 20 million shares
Asian Investors in Japan and Korea had in fact stepped in to save Morgan Stanley till the day Lehman turned over and made space for the US Investment Banks to breathe by the fire in 2008. The current Chinese firesale will lead to a further depressed prognostication for the least fancied of US banks.
A potential solution to this impasse might lie in restructuring the deal on new terms but that is likely to only increase CIC’s take above the 10% limit.