“And this is exactly why companies don't do rights issues. For it to be effective it has to be renounceable, and even then you still need to consider having an underwriter in a sheet market.”
I don’t think your above statement is accurate or reflective of “reality”.
Dacian did an accelerated non-renouncable rights issue (in Feb 2017) on a one for 3.1 basis to raise $94.4 million at $2.00, which represented an 11.9% discount to the $2.27 closing price on the day before the rights issue was announced. The next capital raising to institutional and sophisticated investors and the accompanying SPP was done in July of this year at a higher price of $2.70. Same sheet market.
You might want to educate yourself on the purpose and evolution of accelerated non-renouncable rights issues in Australia. They were designed to combine the speed and economy of a placement with the equity/fairness of allowing all shareholders to participate. Dacian looked after its shareholders when it arranged its mine funding package with a debt and accelerated non-renounceable offer to existing holders. It looked after it’s shareholder’s rights to its future earnings by minimising dilution. Dilution to existing shareholders through capital raisings to S&I investors might seem painful when it occurs, as the share price gets a hit in most cases, but it doesn’t end there. That is the small hit, the big hit comes through the corresponding dilution on your claim to the company’s earnings for the life of mine and potentially any other mines or profitable businesses the company developes. Do the maths.
It’s also ironic and sad that although the invention of RAPID structures are attributable to Macquarie Bank, the ex-Macquarie advisory firm that consulted on the funding package for Sanbrado couldn’t see fit to advise on a structure that protected existing shareholders rights.Esh
“A characteristic of Australian equity capital markets in the last decade has been the evolution of the accelerated entitlement offer. The commercial purpose of the accelerated structure has been to combine the benefits of a placement of speed and economy with the equity of allowing all shareholders to participate in a rights issue.
Accelerated structures have undergone continuous refinement. An early iteration were so called “Jumbo” offers (first used in the Adstream Marine offering in 2001). In its earliest form this offering structure raising consisted of a large placement followed immediately be a non-renounceable entitlement offer to all holders. This was refined by the placement component being substituted by an institutional offer to the company’s own institutional holders with a “book build” to settle the price of any additional shares acquired under the bookbuild. Jumbo offerings shared the weakness of any other non-renounceable offer – if a shareholder did not have funding at the time of the offer they would be diluted.
Refinements sought to improve the position of the retail holder. One method of achieving this was the so-called Renounceable Accelerated Pro rata Issue with Dual bookbuilds (RAPIDS) structure (attributed to Macquarie Bank), where the company conducts not one but two bookbuilds. The first bookbuild takes place immediately after the entitlement offer is announced; institutional holders can elect to take up their holdings and also elect to participate by taking up the entitlements of other institutional holders in a competitive auction process. The amount paid over the nominated entitlement price (if any) is then paid to the institutional holders who did not take up those shares. The institutional holding is followed up by a retail offer to participants who are not qualified to participate in the institutional offering. At the end of this process institutions are invited to participate in a second “bookbuild” to acquire the shares not taken up by the retail holders; any amount bid for shares above the entitlement issue price will be distributed to the non-participating retail shareholders.
In theory this amount should be similar to the market value of rights in a conventional renounceable offer thus appropriately compensating shareholders who do not participate in the offer. The twin bookbuild structure has been implemented regularly in the last five years but there are concerns that it may not necessarily assist retail shareholders. Empirically the price derived in the retail bookbuild was lower than that derived from the institutional bookbuild meaning that renouncing retail shareholders obtain minimal return. It has been suggested that the knowledge that institutions could buy back in under a bookbuild following the close of the retail offer meant that some holders could be motivated to sell down sufficient holdings to reduce the price of the shares prior to the close of the retail offer.
A variation was to have only one bookbuild applicable to both the institutional and retail components of the offer. Institutional holders would still receive their shares ahead of the retail but the renunciations of institutional holders and retail shareholders were dealt with in one bookbuild. The structure proved clumsy in practice however and the delay to the bookbuild of four weeks meant to some extent the benefits of acceleration were lost. The alleged benefits of sale down of entitlements designed to trigger a fall in the share price were also not addressed by this proposal.”
(20min delay)
