Hurry, hurry while rights issues last
How long will the rights issue queue remain open? The temptation must be to raise capital now because the chance won’t be there when you really need it.
With banks cutting off the supply of credit it is lucky that the market is suddenly receptive to equity issues. It is ironic, of course, that the banks have pushed their way to the front of the queue they have created, but with only a limited quantity of money available to go into stockmarkets, companies should grab it while they can.
UK corporates are undergoing a massive debt for equity swap, selling shares to repay borrowings or at least to provide reserves to balance their debt and to avoid breaching loan covenants. Instead of raising a fraction of their current market value, some companies are raising a multiple.
Manufacturers such as Premier Foods and Wolseley plus property groups like British Land, Liberty and Segro are already asking their shareholders for more money. But those issues are dwarfed by the banks. Standard Chartered has raised nearly £2bn but HSBC is currently seeking £12bn and Lloyds investors have the chance to buy the latest batch of shares that the government has underwritten.
But companies issuing shares now are issuing them at what is (so far) the bottom of the market. That’s bad news for the issuer and potentially a good chance to buy for investors.
That the new shares are issued at a considerable discount to market prices (90 per cent in some cases) is irrelevant, although it is maths that defeats many. If the existing shareholders buy they dilute themselves; if they don’t take up the rights they receive the proceeds of selling them. The escalating fees charged for issues are not irrelevant however.
Yet who will buy all these shares? Not all investors are minded or able to commit more money to the stockmarket. Life companies are under regulatory pressure to allocate their assets to bonds or cash rather than risky equities.
Sooner or later the appetite for equity will be sated. Premier has had to bring in US investment house Warburg Pincus as a shareholder in case its own investors do not stump up the cash. There aren’t many such investors however, so the lesson must be to issue shares while you can rather than wait for when you need to.
