Published February 11, 2009

Smaller companies will find it tougher to raise money

By JAMIE LEE

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IT'S every shopaholic's dream: a 45 per cent discount on a rights share for every two shares held. The bearer of such a bargain was CapitaLand, which announced on Monday a 1-for-2 rights issue at $1.30 per rights share to raise $1.84 billion.

The rights issue was a 45 per cent discount to the Feb 6 closing price of $2.36 per share.

The steep discount offered by CapitaLand rings a bell; it was the same discount (to its last traded price) that DBS had put out in its $4 billion rights issue.

This has led some to suggest that such hefty discounts - disbursed by two of Singapore's biggest companies, no less - may become the benchmark for subsequent issues. If DBS and CapitaLand are pricing at a 45 per cent discount, can much smaller companies ask for anything higher?

While there are many factors influencing pricing, such as the number of rights shares against the number of existing shares held and the size of the rights issue, the market is bracing itself for more deeply discounted deals to follow.

This will be bad news for weaker firms that are trying to raise cash from shareholders, now that the banks have turned their backs on lending. Without deep discounts, rights issues may fail if shareholders shun them.

As a result, major shareholders of such companies may be compelled to fork out their own money to take up any excess rights shares. Yet, deep discounts may have a damaging effect on the traded price of the existing shares, and will make equity funding, already expensive, even dearer.

Market concerns over rights issues go beyond the question of discounts. Generally, nervous investors do not like cash calls in times like these, and a rights issue in depressed conditions could even signal funding pressures.

Hence, the nervousness that earlier greeted rumours of a CapitaLand rights issue. CapitaLand shares lost about 30 per cent between Jan 7 (the day it was reported that it was mulling over a possible rights issue) and Jan 24 (when CapitaLand said it was looking at all fund-raising proposals, including a rights issue).

In the event, CapitaLand was apparently able to deflect the concerns, by stressing it was raising funds for future opportunities, and the market took the argument that it was better to raise money now when shareholders are still prepared to answer a cash call.

So CapitaLand shares jumped 11 per cent yesterday to end at $2.63, although short-covering also had a part to play.

But that's CapitaLand. Non-blue chips may find it a tougher sell if they want to turn to shareholders for cash, and if more big caps like DBS and CapitaLand also raise funds and soak up the liquidity, it will be even tougher going for smaller firms.