Rights Issue Execution A-Z — From TERP to Final Filing
What actually happens when a rights issue mandate arrives. TERP calculation, discount setting, prospectus drafting, sub-underwriting, and filing — end to end. Includes Hanwha Aerospace KRW 2.3T (2024) and Volkswagen €11B (2023) global cases.
30-Second Summary
Rights Issue A-Z — Key Numbers
A rights issue lets existing shareholders buy new shares at a discount, allowing a listed company to raise additional capital. Unlike an IPO, rights issues target companies already on the market. In Korea, three methods are legally distinct — rights offering, public offering, and private placement — each with different discount conventions, procedures, and regulations.
In practice, a rights issue deal's success depends on two things: ① how precisely TERP (Theoretical Ex-Rights Price) is set, and ② whether the Equity Story is compelling enough to minimize lapsed rights. Master these two levers and you understand the entire deal.
20~40%
KR Rights Issue Discount
Subject to market volatility
±1%
TERP Calculation Tolerance
Practical margin
20영업일
Prospectus Effective Period
From board resolution
~$300B
Global Rights Issue Market
Annual issuance estimate
Three Methods of Rights Issue
Rights vs Public vs Private Placement
Analogy
A rights issue is like adding new floors to an apartment building. Rights offering = existing tenants get first dibs on new units — they've been there longest. Public offering = open to anyone who applies. Private placement = sold directly to a specific buyer chosen by the building owner. The method determines how fast dilution happens, at what price, and to whom.
Rights Issue: 3 Method Comparison
| Method | Discount | Target | Duration | Regulation | Use Case |
|---|---|---|---|---|---|
| Rights Issue | 20–40% | Existing shareholders (NP rights) | 5–8 weeks | Prospectus required, FSS review | Large cap raise, asset acquisition, debt repayment |
| Public Offering | 5–15% | General public incl. new investors | 3–5 weeks | Prospectus, mandatory pricing formula | Smaller raise, shareholder base expansion |
| Private Placement | 10–30% | Specific institutions / strategic investors | 1–3 weeks | Board + EGM special resolution may be required | Strategic alliance, financial investor onboarding |
Practical selection criteria: Use rights offering for large raises with high shareholder trust. Use public offering to expand investor base. Use private placement for M&A partnerships or strategic investments. Hybrid structures (rights + residual public offer) are common — Hanwha Aerospace used this in 2024.
TERP Calculation — Core Formula
How to Calculate the Theoretical Ex-Rights Price
TERP (Theoretical Ex-Rights Price) is the theoretically correct share price after the ex-rights date (the day after the record date). Since new shares are issued below market price, each existing share's value is diluted — TERP is that post-dilution price.
TERP Formula
TERP = (현재주가 × 기존주식수 + 발행가 × 신주수) / (기존주식수 + 신주수)Example calculation:
Current price: ₩10,000 | Existing shares: 1M
Ratio: 1:1 (1M new shares) | Issue price: ₩6,000 (40% discount)
TERP = (10,000 × 1,000,000 + 6,000 × 1,000,000) / 2,000,000
TERP = 8,000원
Nil Paid Rights theoretical value = Current price − TERP
= 10,000 − 8,000 = 2,000원
Practice Note
Issue Price Determination: Korean Regulatory Practice
- 1Issue price basis: weighted average price over 3 months before board resolution, with FSS-regulated discount applied
- 2Discount drivers: market volatility (VKOSPI), sub-underwriter required return, issuer credit quality
- 3Korean formula vs practice: FSS formula is arithmetic, but practitioners simultaneously monitor market-price coverage
- 4TERP tolerance: ±1% — outside this range requires re-pricing
- 5Warning: if market price drops sharply after pricing, issue price may exceed market (lost in-the-money status) → lapse risk surges
TERP Sensitivity — TERP vs Nil Paid Rights Value by Discount (Base: ₩10,000, 1:1 ratio)
Higher discount → lower TERP, higher nil paid rights value — it's an opportunity cost for existing shareholders, not a free lunch.
Deal Timeline
From Board Resolution to New Share Listing — 8 Steps
Korean rights issues typically take 50–60 business days from board resolution to new share listing. Each step has specific document requirements and disclosure obligations from the FSS, exchange, and legal team. Missing the timeline may require re-pricing or full schedule reset.
Immediate exchange disclosure and FSS notification upon board resolution. Method, size, and indicative price disclosed.
Securities registration statement filed with FSS. Includes financials, use of proceeds, risk factors, Pro-forma EPS.
FSS review complete. Prospectus becomes effective. Official investor outreach may begin.
Record date announced. Shareholders on register as of this date receive nil paid rights.
Nil paid rights listed on exchange separately. Shareholders may exercise or sell rights in market.
Shareholder priority subscription → residual shares (lapsed rights) public offer. Deposit lodged. Sub-underwriter risk formally confirmed.
Subscription proceeds fully paid. Capital credited to issuer's account.
New shares combined with existing shares and listed on exchange. Final issuance results disclosed. Dilution effect takes effect.
Practice Note
5 Things to Check in the Prospectus Financial Section
- 1Specificity of use of proceeds — Is it clearly M&A, capex, or debt repayment?
- 2Pro-forma EPS dilution — How much does EPS decrease after new share issuance?
- 3Lapsed rights disposal method — Re-offer or automatic sub-underwriter pickup, and what are the conditions?
- 4Subscription ratio calculation basis — Is the ratio of existing vs new shares precisely stated as of record date?
- 5Sub-underwriter terms — Are Market Out and Force Majeure clauses included?
Sub-Underwriting
How to Distribute Lapsed Rights Risk
Analogy
Sub-underwriting is insurance. When the Lead Manager guarantees the issuer 'we'll buy any shares that go unsold,' the issuer can proceed confidently. But no single bank wants to hold all that risk alone. So sub-underwriters (other securities firms) take on portions of the risk — just like reinsurers. The issuer pays a premium (underwriting fee), and the lead plus sub-underwriters share the subscription failure risk.
Sub-Underwriting Structure — Risk Distribution
Issuer
Capital raise goal secured — no lapse risk (guaranteed by underwriting agreement)
Lead Manager
Full backstop — must purchase all lapsed shares at issue price. Fee: 0.8–1.5% of proceeds
Sub-underwriters (3–10 banks)
Risk-sharing agreement with Lead Manager. Each bank backstops a specific tranche. Fee: 0.3–0.8% of proceeds
Lapsed Rights Disposal
Sub-underwriters acquire lapsed shares at issue price and sell in market. However, a Market Out clause may release backstop obligation under extraordinary conditions.
Key contract clauses: Force Majeure (underwriter released on acts of God, war, etc.) / Market Out (release if market price falls 20%+ below issue price) / Material Adverse Change (termination on significant deterioration in issuer's financial condition)
Global Cases
VW €11B vs Hanwha Aerospace ₩2.3T
Global Case 1
Volkswagen €11B Rights Issue (2023)
Background
EV transition investment + debt reduction
Structure
1:4 rights offering, 32% discount
Lead Manager
Goldman Sachs + 7 Sub-underwriters
Result
3.2× oversubscribed — overwhelming investor confidence
Lesson: A clear use of proceeds (EV transition roadmap + specific capex) offset the burden of a 32% discount. Investors evaluate 'where does this money go' before they evaluate the discount rate.
Korea Case
Hanwha Aerospace ₩2.3T Rights Issue (2024)
Background
Defense export surge → production capacity investment
Structure
Rights + residual public offer, 25% discount
Controversy
Controlling shareholder subscription rate, mixed institutional reaction
Result
Defense growth narrative minimized lapsed rights
Lesson: Equity Story determines subscription rate. Without a clear defense export growth narrative, even a 25% discount would have generated massive lapsed rights. Bankers must design the investor story as carefully as the deal structure.
Deal Comparison — VW €11B vs Hanwha Aerospace ₩2.3T
Practice Note
Investor Q&A: The First 5 Questions Institutions Ask After a Rights Issue Announcement
- 1What exactly are the proceeds for — Is it M&A, capex, or debt repayment? Be specific.
- 2How much will Pro-forma EPS be diluted — What % drop in EPS after new share issuance?
- 3Is the controlling shareholder subscribing — Participation rate and amount signals management confidence
- 4How are lapsed rights handled — Re-offer or automatic sub-underwriter pickup?
- 5Is another rights issue possible — Investors need a clear answer on 'is this the last one?'
Global vs Korean Rights Issue Rules
US · UK · Korea Regulation Comparison
Rights issue regulations differ significantly by country. The US allows immediate issuance via pre-registered Shelf filings but has no mandatory pre-emptive rights. The UK mandates shareholder priority under FCA rules. Korea requires rights priority under the Financial Services and Capital Markets Act.
Rights Issue Regulation by Country
| US (Shelf) | UK (Rights Issue) | Korea (Reg. Statement) | |
|---|---|---|---|
| Regulator | SEC | FCA | FSS (금융감독원) |
| Filing Document | Shelf Registration (S-3/F-3) | Prospectus (UK Listing Rules) | Securities Reg. + Prospectus |
| Review Period | Immediate post-shelf filing | 7–10 business days (FCA review) | ~20 business days |
| Discount Convention | None (market price basis) | 20–40% (traditional) | 20–40% (formula-based) |
| Minority Protection | No pre-emptive rights by default | Pre-emptive rights mandatory (FCA) | Rights priority by law (FSCMA) |
Practical implication: When Korean companies consider overseas rights issues (including ADR/GDR structures), they must understand both domestic and target-country regulations. In particular, whether Regulation S (non-US investors) or Rule 144A (US institutional investors) applies determines the feasibility of overseas institutional participation.
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