It seems the perfect marriage of interests: companies have an equity raising to pay off debt, and investors get cheap shares.
Several billion dollars worth of raisings are currently underway (see table below) and since the March rally some quick profits have been made on shares offered at discounts of 10 to 20 per cent.
But some investors are still underwater on last year’s raisings. Leighton Holdings raised $700 million from an issue at $35.35 last September and its shares are currently under $25.
A company’s share price can be expected to fall when new equity is issued, because its assets are divided among a greater number of shares. However, since March prices have continued to rise even on the announcements of issues as investors have jumped at the chance to buy new shares at a steep discount in a rising market.
Equity raisings are mostly done in two parts. The major institutions are approached first and may have 24 hours to decide if they will participate. An offer to retail investors will be announced at the same time but the documentation will take three to four weeks to arrive, which gives smaller shareholders time to think about whether to buy and to find the cash.
Some of the factors to consider are whether the money raised will be used to build longer-term value and whether you want to increase your holding of the company or would be better investing elsewhere. It is not be an easy decision when new shares are offered so cheaply.
Investors have to look at each offering on a case-by-case basis. Although much of the focus on new issues looks at their discount to the market price investors must look at how the business will use the money.
The structure of an equity raising will be dictated by how much the company wants to raise and does not always favor the retail investor. A listed company may not increase its capital by more than 15% in a year unless it gets shareholder permission or makes the same offer to all shareholders. That will usually be via a rights issue.
A company issuing less than 15%, such as with the bank offerings last year, can make different offers to different classes of shareholder such as through a share purchase plan to retail investors. A plan usually allows shareholders to buy up to $5000 of stock but companies have increasingly been allowed to offer up to $15,000 and this can be a cheap way to increase your holding if you are allowed to buy more than the basic amount.
Lachlan Partners investment officer Helen Breier says smaller investors can find their holding diluted if they cannot buy enough shares. As raisings become more popular, shareholders are increasingly finding requested allocations are being scaled back.
Investors also have to consider whether buying more shares will distort their portfolio, giving them exposure to too much of one sector. Both Stockland and GPT are hitting shareholders for the second time in months, Stockland offered shares at $5.30 in October and $2.70 last month and GPT’s offer was at 60 cents in October and 35 cents this month (the companies are trading around 2.97 and 0.475.)
UBS has arranged many of the largest equity raisings and its co-head of equity capital markets Simon Cox dates the phenomenon from the beginning of October when the Reserve Bank cut interest rates.
He says the economic downturn was so sharp that companies which had been comfortable with their level of debt in 2007-early 2008 suddenly had to simplify their balance sheets but found debt markets weren’t interested. He says even the largest Australian corporates have found the US debt market is closed to them.
Cox says investor sentiment towards raisings changed markedly from the second week in March when the market began to rally. Until then, investors had been nervous about the economic outlook and worried whether some companies would survive. “But now they are looking beyond that, earnings are not going up but people are happy to re-rate and pay higher price-earnings multiples in expectation of earnings recovery at some later date.”
Cox sees one significant signal of optimism as the increasing willingness of institutions to sub-underwrite the retail component of equity raisings. The sub-underwriter takes a risk that the market will turn against them in the few weeks it takes for the retail offer to go out, and Cox says more institutions are comfortable taking that risk. “It’s a true barometer of investor sentiment towards the market. The direction of this rally is evidenced by willingness of institutions to sub-underwrite the longtail risk in a retail rights offering,” he says.
Now that many of the top 50 companies have gone to the market, Cox says further raisings will be from smaller companies for lesser amounts.
So far there are few signs of investor fatigue, although concerns have been raised that the sheer amount of raisings is depressing the wider market. Lee notes that companies are getting money that might otherwise be invested straight into the market. “Usually it has held back the market, but having said that, it is a very cheap way for investors to obtain more stock,” she says.
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