Rusal: What Happened to the IPO Pop?

Most IPOs "pop" on their first day of trading.  Their prices typically rise, and often by a lot, above the offering price.  The pops tend to be bigger on less developed markets.

Daring to be different, Oleg Deripaska's Rusal had a negative pop.  Indeed, it was down 10.6 percent below the offering price.  Now, some of this can be attributed to the fact that the Chinese market has been trending down, and went down between the pricing date and the first trading date.  The Chinese aluminum firm Chalco went down 9.7 percent between the day that the Rusal issue was priced, and the first trading day.

But however you measure it, Rusal was a big underperformer, relative to typical IPOs.

In some sense this isn't a surprise.  UralSib's Chris Weafer suggested the issue was as much as 50 percent overpriced.

So why did the issue sell out when it was arguably overpriced?  Well, one possibility is that this was a combination of a state bailout of Deripaska/Rusal, and a debt restructuring.  Russian state owned bank VEB took about a third of the issue, and Sberbank and VTB, also Russian state banks took down pieces as well (though I haven't been able to find out how much).  Moreover, participation was limited by the HKSE to big institutional investors, including many banks who had lent Rusal a large amount of money, some of which was to be repaid with IPO proceeds.  Overpaying by the state banks would effectively provide state support for Rusal.  Overpaying by those who had lent Rusal money, who were then paid for their debt using the IPO proceeds, would be a backdoor way of making the banks take a haircut on the debt.

Given that this whole IPO was pushed by the banks as a way of reducing their exposure to Rusal, overpaying 10 percent for the equity can reasonably be seen as a small price t0 pay to take a few pieces out of the Rusal albatross hanging around their necks.

This is a black eye for the Hong Kong Stock Exchange, though.  The negative pop is just the culmination of a very ugly, ugly process.  I don't know if there's soap strong enough to wash the Deripaska/Rusal stench from the HKSE.

Not that they weren't warned, and not that they should have needed a warning to know.  Deripaska is P-O-I-S-O-N.