Investors await multiple rights issues

Article #489 by Edward Rizzo - Published Weekly

In recent weeks, three companies announced their intention to carry out rights issues in the months ahead.

On 5 April, GlobalCapital plc published its 2016 Annual Report and Financial Statements in which the Directors stated their intention to further increase the company’s issued share capital, subject to regulatory approvals, in order to meet their general financing requirements and to eventually repay the company’s €10 million unsecured bonds maturing in 2021. Subsequent to this, on 24 May, GlobalCapital plc announced that it will be convening an Extraordinary General Meeting (EGM) on Friday 23 June for shareholders to consider and approve a number of resolutions including an increase in the authorised share capital of the company of 115 million shares, equivalent to €33.5 million. Moreover, on 26 May, GlobalCapital announced that, in the event that shareholders authorise the increase in the authorised share capital of the company and subject to the approval of the Listing Authority, the Board of Directors intends to issue new ordinary shares by conducting a rights issue in respect of an amount of shares not exceeding €15 million in nominal value later on during 2017. Further information on the rights issue, including the amount of new ordinary shares to be offered, will be announced by the company in due course.

Ahead of FIMBank’s Annual General Meeting which took place on 11 May, the bank published its agenda which apart from the customary resolutions, included four other resolutions, one of which stated that subject to regulatory approval, FIMBank may carry out “one or more rights issues over a period of three years to raise in aggregate a minimum of USD100 million” via the issuance of ordinary shares to its members on such terms and conditions as may be determined by the Board of Directors. The resolutions were approved and shareholders now await details and timing of the first rights issue.

Meanwhile on 27 April, Bank of Valletta plc published its interim results covering the six months ended 31 March 2017 and the bank confirmed that it is planning to issue €150 million in new share capital “over an approximate one year period”. BOV’s Chairman Mr Taddeo Scerri informed financial analysts on the same day that this capital raising exercise may be conducted in more than one tranche.

In view of the statements made by these three companies within a short period of time, some investors may question the reason behind such rights issues.

As a start, it is worth re-iterating that a rights issues is a form of capital raising for a company in which a new issue of shares to existing shareholders is conducted. Generally, the new shares are offered at a discount to the market price prevailing at the time to encourage shareholders to take up their entitlement.

Rights issues are conducted to either repair a company’s balance sheet after a series of loss-making years or to fund a new acquisition. While the planned rights issues of GlobalCapital plc and FIMBank plc are to strengthen the balance sheets of both companies following the significant losses incurred some years back, the situation with BOV is different. BOV’s rights issue is taking place to improve the capitalisation of the bank ahead of more stringent regulatory requirements in the years ahead.

Many banks across Europe have conducted sizeable rights issues over recent months including Unicredit, Deutsche Bank and Credit Suisse. In fact, a recent report across the international media indicated that during the first four months of 2017, European companies raised over €30 billion of fresh equity via rights issues compared to much lower levels in 2016 and 2015. A significant part of the rights issues in 2017 came from two banks -  the Italian bank Unicredit was the largest rights issue at €13 billion while the German lender Deutsche Bank carried out an €8 billion fund raise.

Local investors should by now be accustomed to rights issue as quite a number have taken place over the 25 years since commencement of trading on the Malta Stock Exchange. In fact, last year alone, two rights issues took place.

On 8 March 2016, GlobalCapital plc published a Prospectus in connection with a €4.74 million rights issue. Shareholders were entitled to 1.27 new shares for every 1 share held at a price of €0.291172 which is equivalent to the nominal value of the shares. The proceeds from the rights issue were used to partly finance the redemption of the 5.6% bonds which were due on 2 June 2016.

Earlier on last year, Medserv plc conducted a €15 million rights issue at a price of €1.50 per share whereby shareholders were entitled to subscribe to 2 new shares for every 9 held. This formed part of a dual issue in order to fund the acquisition of the METS group of companies in the Middle East. In fact, concurrently with the rights issue, Medserv also issued a €30 million bond denominated both in EUR and USD.

FIMBank has so far conducted a total of 3 rights issues since it started trading on the MSE. The first rights issue amounted to USD15 million at a price of USD0.75 per share in 2003, followed by another in 2007 of USD25 million issued at a price of USD1.10 per share. While these two capital raising exercises were necessary to increase the capital base to support the bank’s growth in various markets worldwide, the third one of USD50 million issued in 2014 at a price of USD0.65 was done to strengthen the balance sheet as a result of the significant losses incurred by the bank in 2013 and 2014.

Since a rights issue entails the creation of new shares which are normally offered at a discount, a company’s share price generally drifts down ahead of a rights issue. An important calculation that is undertaken once the terms of a rights issue are announced is the determination of the theoretical ex-rights price (TERP). The TERP is the share price that an equity should have following a new rights issue. Financial analysts use the TERP to determine the estimated value of the shares after the rights issue. The TERP is generally lower than the market price at the time due to the creation of the additional shares. The most common way of calculating the TERP is to add the value of the rights issue to the market capitalisation of the company prior to the rights issue. This is then divided by the total number of issued shares after the rights issue is complete.

Since the rights issues of both FIMBank and BOV are large, shareholders who may be contemplating to participate in the eventual capital raising plans of these companies should maintain a certain amount of readily available liquidity to ensure sufficient funds are accessible once the offer is made to them.

The capital raising plans by these companies are likely to be among the most important highlights across the MSE over the next 12 months.

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