Share placements (aka corporate-sponsored jacking of the punter/minority shareholder) are taking Singapore by storm. A recent announcement by MI-Reit, from the BT, attests to this growing trend: “Big recapitalisation exercise at MI-Reit” (from BT):
MACARTHURCOOK Industrial Reit (MI-Reit) has announced a slew of measures to recapitalise and refinance its debts and contractual obligations. It has proposed to raise gross proceeds of $217.1 million through the issue of new units to AMP Capital Holdings and ‘cornerstone investors’ and followed by a rights issue. In addition, it has secured credit agreements for a term loan of $175 million and a bridge loan of $39.9 million.
Under the unit placement, AMP Capital is buying a 16.1 per cent stake in MI-Reit for $22 million. MI-Reit will issue 78.6 million new units to AMP Capital at $0.28 each. The issue price is at a 31.7 per cent discount to the closing price of $0.41 on Thursday.
MI-Reit is also issuing 142.9 million new and fully underwritten units to certain ‘cornerstone investors’, including 9.8 million units to its principal sponsor AIMS Financial Group at $0.28 apiece. The gross proceeds of $40 million will be partially used to meet a contractual obligation to pay $90 million for a private lot at 1A International Business Park.
After leaving the retail investor lying face up in main street, bleeding from multiple stab wounds, MI-Reit then turns around and asks “You wouldn’t happen to have any spare change on you, would you?”, by issuing a two-for-one rights issue:
Following these placements, MI-Reit will undertake a two-for-one rights issue, which is also fully underwritten. It will issue 975.6 million new units at $0.159 apiece to raise $155.1 million. The proceeds will be used to pay down debts and acquire properties from AMP Capital.
‘The transactions are critical for MI-Reit and will restore MI-Reit to a stable platform,’ said Nicholas McGrath, CEO of the Reit manager. ‘The key benefits will outweigh the dilutive effects of the transactions on MI-Reit’s distribution per unit and net asset value per unit, and are in the best interests of unitholders.’
Yippie Kai Yay, MI-Reit retail shareholders.
Why share placements are the best way to screw retail investors
Granted, managers do raise funds for good reasons: e.g. to buy good and cheap properties in anticipation of an upturn in the economy. In the financial pecking order, acquisitions and investments are typically carried out via retained earnings first (the easiest and most hidden, though normally not a REIT path), debt (comes naturally to REITs given their huge store of collateral), followed by equity (the least optimal path, not only because it is the most expensive, but also for reasons stated below)
Here’s how existing retail investors get jacked:
1. Massive discounts on placements shares: “Management and the placement agent agree that in order for placement to be successful, so big discounts are required to attract them.” However, the discount is a huge cost to the company and existing shareholders, in effect moving wealth from current shareholders to new shareholders and financial intermediaries, without creating any new value, and sending a strong signal to market that shares are way overvalued. AMP 1, MI-Reit shareholders 0.
2. Same product, different price: Assuming prices are discounted future cash flows, any share placement discounts mean that the new placement shareholders are receiving higher returns than current shareholders. If MI-REIT reneges on its promise to make new investments, then any higher returns for placement shareholders have to come from existing ones. (2-0). If MI-REIT makes new investments, placement shareholders enjoy higher risk premiums then the current shareholders even though both undertake the same risk. (3-0)
3. Drive by jacking: Share placements can be rushed out in 3 to 14 days days, compared to cash calls which can take up to 3 months. What’s worse, SGX has relaxed regulations on offer price discounts earlier this year, which makes it even easier to mug the retail investor: an EGM is unnecessary if the discount is anywhere south of 20%.
Unfortunately, as refi start cropping up in the midst of tight credit markets, placements seem to be most popular way forward in 2009, knocking cash call off the perch for 2009.From BT: “Placements knock out rights issue in 2009″
The rights issue must, ironically, be feeling rather wronged. Used frequently by companies at the beginning of the year before the market had rallied, rights issues have been unceremoniously cast aside in favour of share placements.
‘We have definitely seen an increase in share placements, since the second half of this year. With improved market sentiment, companies are more willing to raise funds via share placements,’ said Serene Seow, CIMB’s head of equity capital markets.
‘Earlier in the year, right issues were more popular, as the market conditions then had not been conducive for share placements.’
In a volatile market that has risen with unsettling alacrity since March, the share placement has also outclassed its lumbering peer.
Rights issues take about two months to complete from the announcement date, compared to two weeks for a placement exercise.
‘Also, rights issues require financial support from the controlling shareholders, and there may be takeover issues for consideration in some cases,’ said Ms Seow.
The share placement’s offer information statement, which runs over 50 pages and lists the finer details of the placement and company’s financials, usually takes two weeks to be developed, but can be rushed out in three days, according to industry insiders.
After the in-principle approval by the SGX, which takes about seven market days, things move at a fairly rapid clip – the new shares could be issued the next day and listed the day after that.
From the retail investor’s standpoint, it remains to be seen who wins in a placement deal.
To begin with, existing shareholders are not afforded the option of buying the shares like they are in a rights issue, and face the unappealing prospect of share price dilution.
Clouding the crystal ball further, the SGX relaxed regulations on offer price discounts to the share price earlier this year.
‘Now, the company can save time without having to go through an EGM if the discount is more than 10 per cent, but less than 20 per cent. The time from negotiation to market for these deals has been shorten significantly. This should bode well for the market,’ said Mr Ding.<;p>
This could backfire on firms, another equity capital markets insider noted. ‘With this regulation, everyone is going to squeeze the listed firms for a discount of no less than 20 per cent.’
Regardless of whether the placee is Temasek Holdings or a faceless investor, the undisputed champions of this year’s round of share placements have been the placement agents.
Merrill Lynch Singapore got a 1.25 per cent cut of the Noble group placement in September which will yield gross proceeds of $1.2 billion, according to Bloomberg data.
Placement fees this year have ranged from one per cent for Credit Suisse and Nomura Singapore in the $102.4 million Raffles Education Corporation placement, to 5 per cent for Sterling Coleman in the $14.3 million China Animal Healthcare deal.
Like the Donna Summer song, placement agents stress that they work hard for the money.
Yes, printing out a mail-merge form in 3 days is pretty hard work. Give that Merrill Man a Tiger! Meanwhile, we weak hands can only clasp them together, and pray that share placements result in upward price movements.
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SG Uncle Trader, who spends much of his daily life attempting to divide by zero, unwinds by providing an independent and skeptical view on financial and economic issues that affect Singaporeans, with a special focus on the ongoing Global Financial Crisis.
November 12th, 2009 | Category: Daily Money | Comments (1)
