Published February 26, 2009

Downside of pre-emptive rights issues

By SIOW LI SEN

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AT last week's OCBC Bank results briefing for Q4 2008, reporters were surprised to be greeted by a 'food challenged' offering at the end of the meeting with senior management. In previous years, the buffet was spread out over several tables.

An OCBC manager said the food had to be split between the media and analysts who were waiting in another room for their meeting with management.

Unintended, to be sure, but some see it as symbolic; after all, it can look vulgar now to offer lavish meals (even for well-capitalised banks like OCBC) when preserving cash is king.

The bank reinstated its cash dividend scrip scheme to give shareholders the option of receiving the latest dividend in shares instead of cash - which would conserve capital for the bank. And to incentivise shareholders to take scrip, OCBC threw in a discount. Those who choose to be paid their dividend in shares can expect to receive the shares at a discount of about 10 per cent to the market price.

While OCBC is conserving cash, other companies are tripping over one another to raise money from shareholders through rights issues.

Not all might be in need of capital, especially regulatory capital, like DBS, which boosted its coffers by a $4 billion rights issue last month.

Many are engaged in so-called pre-emptive strikes - that is, get the money before others do - such as the $1.84 billion rights issue of CapitaLand. CapitaLand already has $4.2 billion in cash but in these times, $6 billion is better than $4 billion, the thinking goes.

Thing is, only big-market- cap companies with strong backing from major shareholders such as Temasek Holdings and the Lee family that control OCBC can push through these fund-raises.

Investment bankers say that they are less likely to underwrite rights issues by smaller companies given the higher risk.

The rights issue race will increase the divide between the haves and have-nots as only the large blue chips, with their pedigreed parents, are able to pump in the cash, and in so doing, give confidence to others to follow suit.

But the race may not be such a positive development. Smaller companies with a genuine need for cash may disappear as the so-called smart money gets taken out of the market.

This could result in a hollowing out of certain sectors as the smaller companies go under and money is taken out of circulation, to be hoarded in big companies that might not actually need the capital.

In a roundabout way, this could come back to bite the big companies if, as a result, investors and consumers put off spending, whether it's buying a new apartment or going to a restaurant.

Pre-emptive strategies, while good for the individual company, could be detrimental to the overall economy if liquidity gets sucked dry by the big players.