UK leads the way when it comes to corona recaps but can still do better
With its more relaxed rules around pre-emption rights, the UK has led from the front by allowing embattled companies to raise equity to keep themselves alive during the coronavirus pandemic. The market's flexibility means there have been no damaging delays waiting for for formal rule changes. Such pragmatism is admirable, although more must be done to protect retail investors from dilution.
Over the past few weeks, a swathe of UK corporates have sold new shares to protect their balance sheets from the worst effects of the Covid-19 pandemic, or to raise money to take advantage of unexpected opportunities that the crisis has thrown up.
UK market regulations say London-listed companies can raise as much as 9.9% of their share capital without having to seek approval from their shareholders. They can also raise up to 19.9% via a cash box placing structure, which is designed to circumvent the requirement for shareholder approval beyond the standard 9.9%.
Any capital increases higher than 19.9% are typically deemed so large and transformative they must take the form of a rights issue regardless, making them an onerous and long-winded way to raise cash.
But in this crisis, firms have needed to lay their hands on as much ready liquidity as possible, not to transform but simply to stay alive.
To help them, last month, UK regulators relaxed regulations to allow companies to raise emergency capital more quickly, following a consultation with industry bodies such as the Pre-Emption Group.
Over a dozen UK firms have now taken advantage of this over the past few weeks, compared with few share sales in Continental Europe over the same period.
Many countries in the EU, such as France, are traditionally take a less favourable view towards allowing companies to raise equity without formal shareholder approval.
All of these transactions in the UK have launched and been priced under the principle of soft pre-emption. This means giving shareholders first dibs on any new shares issued in a company, without asking them for formal approval via a vote.
These rules have worked efficiently, allowing companies to raise lots of cash rapidly as economies have been locked down, while also allowing the large investors that typically make up the biggest chunk of a public company’s share register a chance to protect themselves from dilution by subscribing.
The alternative method, a rights issue, is expensive and time consuming, and exposes a company to weeks of market risk — all utterly impractical in such perilous times and akin to trying to escape an avalanche by navigating an icy slalom in a double decker bus.
They also involve shareholders who cannot or do not want to participate due to recent losses. Banks were recently left long of stock in the recent rights issues of AMS, the Austrian semiconductor company, and Bavarian Nordic, the Danish pharmaceuticals firm.
Having anchor orders in the recent accelerated transactions have also meant that of the recaps that have happened so far have generally delivered strong returns for investors, and have overnight removed some of the pressure on companies that needed to raise cash.
The largest equity raise so far was by Informa, the UK publishing and business events company, which raised £1bn to repair its balance sheet after it postponed a number of conferences due to Covid-19.
As of Tuesday afternoon, shares in Informa were trading 8.7% above the offer price in the capital increase last week.
But there is a downside. Retail shareholders are at greater risk of dilution as they are excluded from participating in the emergency recaps, unless there is a retail tranche, although they do benefit if there is strong aftermarket performance for a company that has raised fresh equity.
This week, leading figures in the UK financial services industry, including Andy Bell, the founder of the retail investment platform AJ Bell; Anne Richards, CEO of Fidelity International; and Hargreaves Lansdown founder Peter Hargreaves published an open letter to the management teams of London-listed companies calling for them to respect the rights of retail shareholders during share sales.
They are right. In the future, more must be done to accommodate the large amounts of retail money that are invested in UK-listed companies.
One solution could be for companies to offer their retail shareholders discounted stock following a placement to institutional investors without pre-emption.
But for now, retail tranches are time consuming when a company needs to raise equity urgently. For many UK companies, it is simply about survival at the moment, and the current regulations have ensured that firms that can access the equity capital markets have a fighting chance.
The UK market has responded robustly to the crisis to defend those issuers in need. Now it must go further and protect its other weakest members.