Betting On The Bank

Temasek is sitting on a paper loss. Their hoarding of 430 million of Stanchart shares (18.2% estimated at £5.9 bn) started with the purchase of a 11.5 % stake from Khoo Teck Puat's estate in 2006. Then Stanchart shares were trading at £15.24, when the exchange rate was S$2.90 to £1.

Stanchart shares are currently trading at £13.73 (yesterday's quote); the highest level reached during last year was £19.75. The British £ has also taken a pounding, diving from S$2.90 to S$2 yesterday, a stomach churning plunge of 30%. Yahoo! Finance indicates today's range will be £1.9907 - £1.9937.

So what fool (as in "fool me, hah?') would bet that the Stanchart share price would go up 27% in 3 years' time? That's a tantalising return of 9% per annum, assuming the pound-euro correlation doesn't get any worse. Reuters is reporting a sterling drop, as latest UK data adds to the gloomy outlook.

That's the premise of Temasek's of bond offer. The zero coupon bonds which mature in 2014 can be exchanged for Stanchart shares at £36.29 S$36.29 per share during a 3 year holding period, a 27% premium over Monday's price of £14.29 on the London Stock Exchange. Or get your cash back 3 years later with zero payout. That's worse than the pathetic rate of return for FDs at local banks. What Temasek gets in return is an opportunity to offload its bad investment to a bunch of daft investors.

A remisier friend said the stock market is founded on the greater fool theory - one fool buys, and hopes for another fool to come along and pay a higher price. After the debacle of the Lehman shabby deals, is this type of business still legal? Bank of America Merrill Lynch is the lead manager and sole book runner for the bond offer.