When The Mall, one of the UK’s largest retail property investors, announced in May that it was raising £300 million through a rights issue, it became the first company in the sector since the onset of the downturn to adopt this form of capital raising.
Given the continuing deterioration of balance sheets, it’s likely that other companies in the sector will be considering whether to follow suit but the recent wave of rights issues by banks raises some serious questions about the process.
As the value of the property sector falls, this puts companies at risk of breaching their debt covenant unless they come up with an equity injection. Rights issues, which in principle offer an efficient way of raising new capital, offer one solution.
They have the key advantage of allowing a company’s existing shareholders to avoid dilution by taking up their ‘rights’ of first refusal over the new shares. If they choose not to take them up, they can earn cash by selling those rights.
However, concerns arising from recent rights issues from several UK banks, including HBOS and B&B, have exposed serious process flaws in this form of capital-raising.
The main concern is that the process is too lengthy, which in a volatile market heightens the risk that the issuer’s share price falls below the price set for the new shares, meaning that a significant proportion of the issue is then at risk of being left with the underwriters, which would knock confidence in the company. It is a real risk, as HBOS’s rights issue has proved.
The timetable in the UK is too long, making rights issues difficult and expensive to execute when compared to secondary capital raising in other markets such as the US.
There are three separate elements to this. First, the length of the notice period for an EGM if shareholder approval is needed for a rights issue (as many do).
The second key driver of the timetable is the 21-day offer period required by the Financial Services Authority’s rules for all rights issues.
Preparation of the prospectus is the third timetable issue. The timetable for approval of a prospectus can be anything up to 12 weeks and is very unlikely ever to be able to be completed in less than four weeks.
Speeding up the process
Amending the rules on increasing authorised share capital and discounts to reduce the need to have to go back to shareholders for approvals for rights issues (beyond AGM approvals) could shorten the timetable and alleviate the risks. Also, reducing the rights offer period from 21 days (as is the current position) to 14 days under Listing Rules would help.
There is no reason why shareholders could not read the rights issue prospectus and make a decision as to whether or not to take up their rights in 14 days rather than 21 days.
Third, radically reduce the requirements for prospectuses for pre-emptive offers.
Streamlining the process by reducing the rights issue timetable, while preserving shareholders’ pre-emption rights, would give companies a quicker, cleaner way to raise capital.
John Lane is a partner at law firm Linklaters