The great "rights issue" ding dongThere is a long-standing tradition with the stock market known as "pre-emption rights". Pre-emption rights allow existing shareholders to participate on equal terms in new fundraisings.
In recent times this tradition has not been observed in certain high profile cases. The most publicised has been the raising of funds from certain Middle Eastern sources (covered at the time in the Credit Crunch Diary on this website) by Barclays Bank disallowing any existing shareholder to participate. Not only that but the new funders were issued with tax-deductible securities which paid a coupon of 14%. So unfair was this seen to be that the City of London’s largest institutional investor, Legal & General Investment Management, is understood to be calling for the resignation of the chairman of Barclays.
The accepted way to give all existing shareholders an opportunity to subscribe for new shares is known as a "rights issue". It is fair since these shareholders have risked their capital with the company in the past and furthermore the new shares or "rights" are invariably priced at a discount to the current market price. Arithmetically, if more shares are issued and the market capitalisation of a company stays the same, the share price of each share in issue must fall (total value divided by more shares). In such circumstances the existing shareholder can "average down" his holding by subscribing for the new rights. A reward for more finance in a company with an improved balance sheet.
A further ding dong of Barclays proportion is raging. It concerns Rio Tinto announcing an agreed deal with Chinalco, the state-controlled Chinese aluminium producer, such that Chinalco will inject $19.5bn by taking convertible bonds and a minority equity stake in nine mines. Major existing shareholders are furious and want the deal overturned in favour of a $10bn rights issue that they will support. What makes matters worse is that Rio Tinto rejected an offer by BHP of Australia the world’s biggest miner. Existing shareholders believe a rights issue that strengthens the balance sheet will entice BHP back to the table. China of course has been taking stakes in mining companies around the world, not least in Africa, for the past 20-30 years to safeguard supply lines to their manufacturing base.
In this time of heavily indebted balance sheets, rights issues are, notwithstanding Barclays and Rio Tinto, in favour. Here is a list of companies that have issued rights in recent times :-
Xstrata, Workspace, Hammerson, British Land, Beazley, Catlin and Cookson
and a list of those that are rumoured to be planning to issue rights:-
Liberty International, William Hill, Premier Foods, Land Securities, Legal and General and Segro
For individual shareholders the offer of even heavily discounted rights presents a dilemma. Throw good money after bad or see your existing share price fall as the rest get cheap shares. It is not theoretical either. At this minute I have to decide whether or not to take up the British Land rights that carry a discount of 53%.
jgs-2009
