Traders cry foul from loss on SIA leveraged shorts over ex-right pricing

MANY traders saw their entire positions in the 5x Short Singapore Airlines (SIA) daily leverage certificates (DLCs) go to zero on Wednesday when SIA shares rose more than 20 per cent upon trading ex-rights.

But the short squeeze would not have been as dire as it turned out to be if Societe Generale (SocGen), the issuer of the certificates, had not surprised the market by using what many believe is an aggressive formula to adjust for SIA shares ex-rights, giving traders very little time to hedge their bets in reaction, some traders argue.

At 8.38am on Wednesday, before the market opened at 9am, SocGen announced via a Singapore Exchange (SGX) filing that the theoretical ex-rights price (TERP) of SIA shares based on the previous close would be adjusted to S$3.71, instead of S$4.16 as many had assumed.

According to SIA's TERP formula published in March, the TERP would have been S$4.16 based on the last close price of S$5.91 on Tuesday, taking into account the issuance of new rights shares but not the mandatory convertible bonds (MCBs) that SIA also issued as part of the same cash call.

To recap, SIA raised S$8.8 billion by issuing rights, and raised another S$3.5 billion via a 10-year MCB issue on the basis of 295 rights MCBs for every 100 existing shares owned. Priced at S$1 each, the bonds come with zero coupon. If SIA does not redeem the 10-year MCBs before maturity, they will be converted into shares based on a conversion price of S$4.84.

However, SocGen assumed in its adjustment that all the MCBs would be held until maturity and fully converted into shares at the conversion price of S$4.84 per share.

In response to questions from The Business Times (BT), a SocGen spokesperson said: "The principle of a corporate action adjustment is to ensure any dilutive or concentrative effect on the underlying asset price is offset by way of adjusting the terms and conditions of the DLC. Since both the rights shares and rights MCBs may have a dilutive impact on the stock price, in our opinion both need to be taken into account for the adjustment. This was done in accordance with the listing documents for single stock DLCs."

To be sure, even if SocGen had used the TERP of S$4.16, the intraday rise in SIA shares was still more than 20 per cent. The 5x Short DLCs fall in value by 100 per cent for every 20 per cent rise in underlying SIA shares, which means the value of the certificates would still be wiped out entirely.

However, traders said they would have had more time to react if SocGen had made its position clear sooner, and given bearish investors more headroom with a higher TERP. Instead, a so-called "airbag mechanism" was triggered 56 seconds after 9am on Wednesday as soon as SIA shares hit S$4.27, an increase of more than 15 per cent from SocGen's TERP. Trading was suspended thereafter.

Trading in the 5x Short SIA DLCs has been permanently suspended as they will not recover in value even if the underlying stock trades at a lower price, SocGen said.

Phillip Securities trader Robin Ho told BT: "Many investors who invested in this had used S$4.16 as a benchmark and nobody knew that they (SocGen) would use another benchmark, S$3.71. That's why the investors who lost money are saying that it's not a fair game. They didn't know why the airbag burst."

The airbag mechanism is built into DLCs to slow the rate of loss in the value of DLCs in extreme market conditions. But if the TERP used by SocGen wasn't so low, the airbag wouldn't have been triggered so early in the day.

Mr Ho added: "If I had known that the airbag was going to burst, before the market opened I would have hedged my position or cut my losses, knowing that when the airbag bursts there's going to be a lot of short-covering in the market."

SIA shares reached an ex-rights high of S$5.04 on Wednesday, which works out to a pre-ex-rights price of more than S$8.00. Mr Ho believes the surge in SIA shares and long SIA DLCs that day was partly due to traders having to quickly hedge their positions: "SIA's fundamentals remain poor, nothing justifies why the price would go up."

There is also the question of unusual trading activity during SIA's pre-close session on Wednesday, when a block of three million SIA shares changed hands just before 5.05pm, pushing the share price down from S$4.63 to S$4.40, where it eventually closed.

Some have questioned if this could be the action of someone throwing SIA shares down after ramming them up earlier, and if this person may had been privy to how SocGen would make its ex-rights adjustments, even as the rest of the market was caught off guard.

Mr Ho said: "Finding out who is the party who dumped the shares during the after-market matching exercise is important, and only SGX and the MAS have the means to do it."

BT understands that some traders have complained to SGX and the Monetary Authority of Singapore (MAS) about SocGen's handling of the ex-rights adjustment. SGX oversees the listing and regulation of DLCs and BT has reached out to SGX for comment. MAS did not immediately respond to a request for comment.

DLCs are a Specified Investment Product (SIP) under MAS guidelines as they have structures, features and risks that may be more complex to everyday investors.