A big development on Tuesday evening as a Seoul court ruled in favour of 2 SMEs looking to invalidate KIKO contracts that have wiped out their profits. LCD backlight maker DS LCD (051710 KS) & B2B office supply company MONAMI (unlisted) won their cases against SC First Bank and are temporarily freed from their KIKO obligations as of Nov 3, when the lawsuits were filed. Both companies claimed that the risks were not fully explained to them regarding these “hedges”.
{http://online.wsj.com/article/SB123064735868942423.html}
The ruling read: “The bank has not fulfilled its duty to recommend additional measures to limit losses…and to clearly and sufficiently explain possible risks that the contracts contain.”
This is a big deal for both companies, as KIKO losses in Dec alone amounted to $20m for DS LCD and $1m for Monami. SC First Bank is expected to take the losses.
This case ruling also sets a precedent for other SMEs to follow suit and sue their banks for selling them the same KIKO products. As noted by the KOREA TIMES: “According to the Korea Federation of Small Business, 471 small firms were holding KIKO contracts worth $5.9bn in August ― of them, 170 reported KIKO-related losses estimated at W1.8tr at an exchange rate of W1,300/USD. Of that total, W1.1tr ~ W1.2tr has yet to be paid.” {http://www.koreatimes.co.kr/www/news/biz/2008/12/123_37033.html}
As such, further lawsuits could mean more KIKO losses being taken off the books for SMEs, which could mean a delay in the expected wave of SME bankruptcies in 2009. THIS IS A NEAR-TERM POSITIVE FOR SMEs.
For the banks, this latest ruling implies that they will have to shoulder KIKO-related losses for the SMEs. And this is yet another reason why more govt capital injections may have to take place. STAY AWAY FROM KOREAN BANKS.
For those looking for a little punch to their long portfolios, take a look at these stocks which were recently beaten down due to KIKO losses:
JVM (054950 KS)
* Maker of innovative pill dispensing machines
* Stock de-rated to a microcap this year (-80% YTD) at $55m market cap
* Significant KIKO losses was the main culprit for this year’s decline
* Trades on 5x trailing earnings
* Company visit a few months back unveiled a still healthy business, but mounting KIKO losses made the stock untouchable
* ASK FOR VISIT NOTE
JINSUNG TEC (036890 KS)
* Maker of excavator rollers & other excavator components
* Caterpillar partnering with Jinsung as part of efforts to move into Chinese machinery market, currently dominated by Hyundai Heavy, Doosan, and handful of Chinese makers
* Caterpillar partnership with Jinsung not yet finalized, but Jinsung claims an agreement is close to being done
* Partnership story also sparked takeover speculation, especially given Jinsung’s recent 50% fall (due to revelation of KIKO losses) and the stock’s now-tiny market cap of $65m
* Conceptually a strong story, given Caterpillar’s efforts to move into the Chinese market & China’s recently announced aggressive fiscal stimulus plan for 2009
* Trades on 9x trailing earnings
* ASK FOR VISIT NOTE
>>> WSJ: COURT SUSPENDS CURRENCY PACTS <<<
Two Korea Firms That Lost on Won’s Fall Win Temporary Halt in Contracts
DECEMBER 31, 2008
By SUNGHA PARK
SEOUL — A Seoul court ruled Tuesday in favor of two local companies seeking to invalidate currency-options contracts that hurt them when the won weakened sharply against the U.S. dollar in 2008.
Ruling in favor of manufacturers DSLCD Co. and MonAmi Co. against SC First Bank, the Seoul Central District Court said the options contracts — known as “knock in-knock out,” or KIKO, contracts — should be temporarily invalidated because the bank didn’t sufficiently protect the companies against the possibility of a sudden, steep decline in the won’s value against the dollar. The companies will be freed from their obligations under the contracts from Nov. 3, the day they filed the lawsuit, until the court makes its final decision in the case. It was unclear when a final decision might come.
Such contracts became big news in South Korea in September when losses related to them forced some companies into bankruptcy. Thirteen big banks aggressively sold the currency options to more than 450 companies, mostly small and midsize exporters, in 2007 as the won strengthened against the dollar. Banks recommended that companies hedge against a stronger won and predicted the currency would remain strong. Instead, the won weakened to roughly 1,500 won to the dollar from less than 1,000 won to the dollar. Tuesday the won was trading at 1,259.50 won to the dollar.
DSLCD’s losses under the contracts up to December total more than $20 million, while MonAmi’s losses were more than $1 million.
“The bank has not fulfilled its duty to recommend additional measures to limit losses…and to clearly and sufficiently explain possible risks that the contracts contain,” the ruling read.
A spokeswoman for SC First Bank said, “After receiving the ruling, we will review the document and decide what to do.”
About 100 small and midsize companies filed a class-action suit against 13 banks that sold KIKO contracts on behalf of unnamed sellers, and a number of other Korean companies are reportedly preparing similar suits.
—Jin-Young Yook contributed to this article.
Write to SungHa Park at sungha.park@wsj.com
