The severity of the COVID-19 shock to economic growth has been more severe than that experienced in 2008.
But it has been notable that the requirement of companies for new capital has not been anything like as marked as in the financial crisis, when vastly higher amounts were needed than has been the case this time.
The UK government injected £45.5bn into the Royal Bank of Scotland alone between October 2008 and December 2009. This was on top of the £12bn that RBS had raised from shareholders in April 2008.
The other banks had huge amounts of additional capital invested into them, while a swathe of other companies, from housebuilders to real estate trusts, also underwent rights issues.
In contrast, the amounts raised this time have been fairly minuscule – thus far it’s been well under £10bn of new capital. This is arguably testament to the fact that government aid has come in a different form this time, taking on company operating costs rather than injecting capital.
Another major difference this time has been the relaxation on the rules surrounding pre-emption that were introduced in April.
Pre-emption allows existing shareholders first dibs at buying new shares, and thus preserving the relative value of their shareholding, and compensates them for dilution with nil paid rights.
In late March the Pre-emption Group, a body that comprises the Financial Reporting Council and various corporate brokerages, relaxed the rules so that pre-emption only kicked in at 20%, allowing many companies to raise the money they needed without going to all the hassle and bother (and cost, in terms of banking and underwriting fees, and documents like a prospectus) of a rights issue.
The concern was that traditional underwriters – investment banks and institutional investors – would not be able to soak up all the capacity required, or quickly enough.
Previously, under UK Company law the maximum amount of equity that could be raised in a placing was 10% - specifically to avoid dilution. In America the situation is different, and shareholders do not generally benefit from ‘pre-emption rights’.
As a result, most of the equity raised this year has been through share placings, where the company is permitted to approach new shareholders, usually institutional ones, very quickly and at low cost – although this has been criticised by some shareholder groups like ISS and Glass Lewis.
Thus Compass, the hospitality business, raised £2bn in mid-May through a placing – the biggest one yet seen this year. Informa, the media group, had raised £1bn a few weeks earlier.
Many other companies have taken advantage of the 20% facility, including Restaurant Group, Gym Group, Foxtons, DFS, Hiscox, and National Express.
Other companies, food group SSP and online retailer ASOS, have issued 19% new equity, while Hays, WH Smith, JD Wetherspoon, and Polypipe have raised 13-15%. None of these capital raises would have been permissible under the old regulations.
Selling shares in assets is an alternative to this, with Marstons getting an equity injection by pooling its brewing assets with Carlsberg. SIG plc has combined a 20% placing with an offer for subscription (where investors don’t receive the compensation of nil paid rights).
Some companies have gone down the traditional route. This week Whitbread concludes its rights issue to raise £1bn, with the existing shareholder base benefiting from pre-emption.
The rights issue process was tightened up and shortened after 2008, when the cumbersome procedure exposed the ability of hedge funds to ‘short’ stock at the Cum Rights price, and then settle their trades at the Ex Rights price.
As a result, it is now much swifter and less bureaucratic – as demonstrated in the Whitbread raise, which concluded in little over two weeks.
The verdict on the attractiveness of the opportunities presented thus far? Not obviously great, with only ASOS standing out as a compelling buying opportunity – perhaps due to its online characteristics. Some of the others may take longer to bear fruit.
Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.
