Fishburn Hedges

17.12.2010

The Institutional Investor Council (an umbrella organisation of the ABI, IMA and NAPF) has recently published a report following an enquiry into rights issue fees.

This report tells us that “a significant portion of the fees companies pay for underwriting rights issues is not a good use of shareholders’ money.”   You don’t say.

Until just a few years ago, rights issue underwriting commissions tended to cost the issuer something of the order of 2.5 per cent of the amount raised.  This was based on a standard two per cent cost for the first 30 days of the underwriting period and then 0.125 per cent per week thereafter until the rights issue became unconditional, typically after shareholder approval at an EGM.

Of this, the investment banks and brokers would be paid an aggregate of 0.75 per cent with the remainder paid to sub-underwriters (often the issuing company’s shareholders).  For the most part, companies received good value for the fees they paid, getting certainty of outcome at a reasonable price.

Since then fees have shot up, with the majority going to bankers who assume little more than counterparty risk.  All of this might matter less if rights issue discounts had narrowed or at least remained constant, but the opposite is true.  Can it really be the case that all issuers represent the same risk?  The credit ratings of those same issuers tell us otherwise.

It appears that companies are paying more and receiving less for rights issue-related services than at any time in the past.  So the FT’s Lombard column (“Companies must take this opportunity to squeeze fees”, FT 14^th December, 2010) was right to ask why companies don’t seek better value and to prompt CEOs to push harder for fee savings.

It could be argued that during the financial crisis, banks could – and did - charge what they liked.  We may now find that issuing companies see the opportunity to turn the tables on them.

Posted by Andy Berry