Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Wednesday, January 21, 2009

The Return of the Rights Issue

Capital raising has recently been a highly technical business, mostly involving lines of credit and debt issuance. Between the advisors, Treasury and the finance team, prospectuses were created, and contact made with banks and debt investors.

However in these days of expensive credit – where it is available – companies are likely to return in greater numbers to the distinctly untrendy rights issue. This in turn will require IR people to dust off (or learn) some forgotten skills.

There are 2 interesting aspects of this, one structural and one on communication.

The rights issue process itself was designed in a pre-internet, Talisman-settlement era. Rules built in to the FSA Handbook and into the Companies Act require a 39 day sequence of events. However in late November the HM Treasury’s Rights Issue Review Group recommended a much abbreviated process. The FSA is now in its turn consulting on a change in its rules.

Under the FSA proposal, companies could allow as little as 14 days, or 10 business days, for investors to decide to take up an offer of shares. At present, rights issues must remain open for at least 21 days. That delay can leave the shares of the issuing company below the price of the new shares, increase the risk for underwriters of the issue, and create a market instability – as we famously saw last year.

Last week, the ABI weighed in with proposed a change to its guidelines, under which companies would be allowed to issue shares up to two-thirds of their existing capital, rather than one-third, without holding an extraordinary shareholder meeting. That would also speed up the process.

The debate on technical issues such pre emption rights, the usefulness of prospectuses and other detail rumbles on, but most believe that this change is more about fundamentals.

As the marketing of the new shares extends beyond existing shareholders, the communication challenge is about helping investors not only understand the terms of the offer, but also the equity story. And, especially in ex privatisation stocks, helping retail holders decide. Existing institutional holders are likely to be able to decide in a matter of hours whether to take up an allocation, although Transparency Matters knows of one recent issuer who had to undertake 200 investor meetings to get the issue away successfully. The retail investors even more support.

With this comms challenge and the technicals, IR teams are going to need every minute of the 21 days…


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