Published February 17, 2009

Underwriters shy away from smaller firms

Their rights issues come with higher risk, say bankers

By JAMIE LEE

	Email this article
	Print article
	Feedback

BANKS and corporate finance firms are less likely to underwrite rights issues by smaller companies given the higher risk, bankers say.

This comes as the number of rights issues is set to go up, with businesses beefing up their balance sheets to brace for weakening sales and asset writedowns, or for cheap buys during the downturn.

'This trend may be borne more out of necessity than choice,' said George Lee, OCBC's head of group investment banking, adding that credit still remains tight.

Co-head of Kim Eng corporate finance Ding Hock Chai said that many companies were already planning for rights issue during the fourth quarter of last year.

But one banker from a local lender who declined to be named said: 'Banks don't want to underwrite these issues from smaller firms because there are real risks.'

He added that some issues could also be out of 'desperation' as the smaller companies - which are not as strong financially as the blue chip players - are trying to raise cash to stay afloat.

'These smaller rights issues are generally offered by smaller listed companies whose shares may be less liquid,' said Mr Lee.

'Under current equity market conditions, the risk of under-subscription will be higher. Hence, it may be difficult for them to procure underwriting arrangements,' he said.

This means that the major shareholders need to back the rights issue by paying out of their own pocket, bankers say.

Figures from Thomson Reuters show that out of the 16 rights issues done in the second half of last year, nine were not underwritten. These included ecoWise Holdings, Ban Joo & Co and Auston International Group.

But this may not be a bad thing as it could be an opportunity for management shareholders of companies to build a stronger grip on the business.

'For existing management shareholders with less than 51 per cent control, it's a great and cheap way to consolidate control,' said Mr Ding.

Investors also benefit from a steep discount that rights issue can offer, as there are no limits on the discount from the market price, said Mr Ding.

In contrast, firms can seek a private placement without calling for shareholders' approval if the discount does not cross the 10 per cent limit, he added.

Companies raising money could also be on the prowl for M&As, said the banker from a local lender, who added that while a wide price expectation gap between buyers and sellers still remains, it would soon narrow as both parties 'come to their senses'.

Property developer CapitaLand had recently announced a one-for-two rights issue to raise $1.84 billion.

The rights issue was at 45 per cent discount to the last traded price on Feb 6.