Tuesday, 10 February 2009
Rights issues a smart fund-raising option
This year, equity rights issues will continue to present an attractive fund-raising option for listed corporates in Asia and globally. With the ongoing economic uncertainty, debt issuances may prove difficult for even the best of credits, as investors worry about increased default rates and demand more onerous covenants and wider pricing.
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Rights issues a smart fund-raising option
James Grandolfo and Paul Porter
9 February 2009
This year, equity rights issues will continue to present an attractive fund-raising option for listed corporates in Asia and globally. With the ongoing economic uncertainty, debt issuances may prove difficult for even the best of credits, as investors worry about increased default rates and demand more onerous covenants and wider pricing.
Rights issues provide a capital-raising alternative that does not require granting collateral security, instituting restrictive covenants or increasing leverage. Conducting a rights issue is also quicker than a traditional equity offering, and fees paid to investment bankers are usually lower than those charged for an initial puboic offering or other equity capital-raising exercises.
Recent rights issues - including those of State Bank of India, HBOS, Carlsberg, United Tractors and Anheuser-Busch InBev last year - have proved successful despite deterioration in world equity markets.
In a rights issue, an issuer grants its existing shareholders options, or “rights”, which expire within a specific time frame (usually 30 days), to buy newly issued shares. As a rights issue is generally extended to all existing shareholders on a pro rata basis, there is no dilution for offerees who can participate and who choose to exercise their rights. In certain jurisdictions, rights can be freely traded before the exercise date as separate securities on the exchange where the issuer’s shares are traded.
The offering price in a rights issue may be at the market (the current market price of the shares) or at a discount to the market share price. Given current market conditions, rights issues are generally being priced at steep discounts to the stock price. The deeper the discount, the greater the chance of a well-subscribed rights issue. However, deep discounts increase the cost of the new capital for the issuer.
Issuers can make use of oversubscription rights, which allow offerees to buy any remaining unsubscribed shares. Issuers may also offer over-allotment rights, which allow a predetermined amount of additional shares to be issued to existing shareholders if the issue is oversubscribed.
In addition to playing the role of financial adviser, investment bankers can also play the role of underwriter by “backstopping” the rights issue. In a backstopped, or underwritten, issue, the investment bank, usually for a higher fee than if just advising on the issue, agrees to purchase all or a portion of unsubscribed rights at an agreed upon backstop price.
Since an issuer’s existing shareholders could reside anywhere in the world, the issuer and investment bankers, along with their international legal counsel, must carefully consider the securities law requirements of various offer jurisdictions and determine where the rights offer documents may be distributed. In addition, procedures should be put in place to carefully scrutinise all share purchase applications received by the issuer, to ensure that such applications comply with the legal and regulatory requirements of each investor’s jurisdiction. In certain circumstances, existing shareholders are restricted from participating in the rights issue.
James Grandolfo is Allen & Overy’s international capital markets partner and Paul Porter is an associate
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