Analysis: Dash for emergency cash provokes fund industry backlash

Amadeus Fire AG

21/04/2020 16:04

* Firms scramble to raise money as revenues slide
    * Some investors taking tough line on stumping up cash
    * Tensions as UK rule change leaves some investors in cold

    By Simon Jessop, Sinead Cruise and Abhinav Ramnarayan
    LONDON, April 21 (Reuters) - As companies pull the emergency
cash cord to help them through the coronavirus crisis,
shareholders have been split by an easing of the rules to make
it easier for them to turn to investors with the deepest
pockets. 
    In pursing this path, cash-strapped publicly-listed
companies and institutional fund managers risk alienating
legions of loyal retail investors, whose holdings are diluted.
    A change to British market regulations last month enabled
firms to raise equity equivalent to up to 20% of their share
capital in quick-fire share sales.
    These allow companies to skip the conventions of investor
roadshows, the publication of detailed prospectuses and
so-called pre-emption rights, which bestow equal rights on all
shareholders to participate in any capital increase.
    "This is clearly an extraordinary situation so it's that
balance between the companies that urgently need funds and the
ease of execution of these transactions versus the sanctity of
pre-emption rights," Claire Keast-Butler, a partner in London at
law firm Cooley, told Reuters.
    A total of 3.7 billion pounds ($4.5 billion) was raised by
79 companies listed in Britain between March 2 and April 17, AJ
Bell, which helps retail investors save and invest in the stock
market, has calculated, some via emergency cash calls.
    Richard Buxton, head of UK equities at Merian Global
Investors, said he proactively encouraged British food and
drinks provider SSP  SSPG.L  to raise cash last month.
    SSP ended up raising 216 million pounds, mostly from its two
biggest investors BlackRock  BLK.N  and Merian.
    While acknowledging the capital raising would be "pretty
dilutive" and had its critics among investors who were not
included, Buxton said Merian decided it was better for SSP to
act now, to avoid coming back for more later.
    "We wanted to get it over and done with, get the issue
knocked on the head so the company could stand its corner."
    Travel and retail are among the industries feeling the most
immediate effects of the coronavirus crisis, and it is these
sectors which have most quickly turned to big investors, often
leaving smaller shareholders with a lesser stake. 
    "It seems very probable that greater numbers of firms will
come to market for cash. For those institutions or funds with
cash, this could be an opportunity to take a stake in a business
they like, or top up an existing holding, at an advantageous
price," Russ Mould, investment director at AJ Bell, said.
    Mould describes dilution as "the enemy of the investor", as
it lessens their share of a company's future profits.
    Not all companies are going to find it easy to tap
investors, however deep their institutional pockets, for cash
either now or in the future.
    "I think those who have the highest chance of getting the
best result can combine three things: a well-liked management
team, a supportive bank group and a strong shareholder
register," Andreas Bernstorff, head of equity capital markets at
BNP Paribas, told Reuters.
    
    'NEED FOR SPEED'
    Leading fund managers Schroders  SDR.L  and Invesco  IVZ.N 
have both weighed into the debate, with Schroders largely
supportive of the potential need for fast-track issuance, while
Invesco warned boards to first look at other options, such as
turning to the government for help. urn:newsml:reuters.com:*:nL8N2BQ4IQ urn:newsml:reuters.com:*:nL5N2BW00R
    "Companies shouldn't, especially if your share price has
been hammered, necessarily think of equity as the first
solution," Piers Coombs, head of the London office at investment
bank Goodbody, told Reuters.
    Firms listed in Britain have been the biggest users of quick
equity raisings because many continental European countries
demand shareholder approval first, a rule that has forced most
firms to instead agree new credit facilities with banks, such as
the $15 billion line secured by Airbus  AIR.PA .  urn:newsml:reuters.com:*:nL8N2BG0NO
    Only Amadeus  AMDG.DE  and Nexi  NEXII.MI  have so far
tapped European equity markets, for 750 million euros and 43
million euros respectively, although both also issued
convertible bonds as part of the overall funding package.
    In Britain, among the biggest cash calls were Informa
 INF.L , which raised 1 billion pounds in a sale equal to 19.99%
of its existing share capital and fashion retailer ASOS
 ASOS.L , which raised its issued equity by 18.8% to bolster its
finances by 247 million pounds.
    It is this type of deal which prompted a group of City of
London heavyweights, including Fidelity International Chief
Executive Anne Richards and AJ Bell founder Andy Bell, to send
an open letter to British companies this week demanding they
respect the rights of retail investors. urn:newsml:reuters.com:*:nL8N2C81OL
    The issue is not just a British one.
    In Australia, the regulator has also loosened the rules,
extending the period for which companies can be suspended and
still raise capital with less documentation, while the stock
exchange, among other measures, upped the proportion of capital
that companies can raise through placements from 15% to 25%.
    Whether the coronavirus crisis raising prove to be a one-off
will only become clear once it is over.
    "We have always said, in exceptional circumstances, we
accept that pre-emption does sometimes have to be set aside just
because of the need for speed," Merian's Buxton said.

    For an interactive version of the graphic, click here https://reut.rs/2Km2C94.
 
($1 = 0.8149 pounds)

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INTERACTIVE GRAPHIC - Cash-strapped UK firms raise capital
interactive    https://reut.rs/2Km2C94
GRAPHIC - Cash-strapped UK firms raise capital     https://reut.rs/2Km2pCO
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 (Additional reporting by Paulina Duran in Sydney;
Editing by Alexander Smith)
 ((simon.jessop@thomsonreuters.com; +44 (0) 207 542 5052;
Reuters Messaging: Reuters Messaging:
simon.jessop.thomsonreuters.com@reuters.net))