When Rights Go Wrong

Recent banking rights issues show which parts of the process work — and which don’t.

It takes a combination of bad luck and bad decisions to become a textbook example of how to mishandle a rights issue. Bradford & Bingley found this out the hard way. First, the UK mortgage lender announced a £300m (€374m) capital increase in May after denying press reports that it was considering such a move. Next, as its share price fell and its chief executive, Steven Crawshaw, stepped down on health grounds, the bank slashed the rights issue offer price and promised private equity firm TPG a 23% stake in the company in return for a £179m investment. Then, when ratings agency Moody’s downgraded the bank’s stock, TPG dropped out of the deal and the share price fell close to the new issue price of 55p. While institutional investors jumped in after TPG’s withdrawal, existing shareholders took up less than 30% of the new shares by the deadline in late August.

Many of Bradford & Bingley’s woes were self inflicted, accelerated by poor management and antiquated information systems that left it slow to react to its own problems and fast-changing moods of the market. But the drawn-out saga also shows that rights issues, previously regarded as a pedestrian way to raise funds, have their drawbacks during these troubled times. (So troubled, in fact, that Bradford & Bingley was nationalised in late September.) The question now is what changes can be made so that other companies raising funds find the rights route quicker and simpler?

Much Could Change…

With the first anniversary of the start of the credit crunch having just passed, a record number of banks have gone to shareholders for record amounts of cash through rights issues. (See “Cap in Hand” at the end of this article.) Belgian-Dutch bank Fortis, part-nationalised over the same weekend as Bradford & Bingley, tapped shareholders for €13 billion in September 2007 to help fund its portion of the takeover of ABN Amro. France’s Société Générale announced a €5.5 billion rights issue in January this year to help it recover following its massive rogue trading case. And another French bank, Natixis, is currently closing a €3.7 billion rights issue to repair its damaged balance sheet. But it’s the struggles of Bradford & Bingley and two other UK banks — RBS and HBOS — that have attracted the most attention.

With their rights issues underwritten by investment banks, the three companies were never in danger of missing out on getting the funding they wanted, but their fortunes were nonetheless varied. Less than 9% of the shares in HBOS’s £4 billion capital raising were taken up by shareholders. RBS’s £12 billion rights issue — the largest ever in Europe — was successful, but its shares were extremely volatile during the offer period.

Because of such share price swings, many finance experts have begun to wonder whether there are problems in how rights issues are brought to market. Merrill Lynch underwrote part of RBS’s issue, and Rupert Hume-Kendall, the bank’s chairman of global equity capital markets, says he’s rarely seen a company “so heavily buffeted” by speculative investors “just attempting to make whatever money they could out of shorting stock, hedging stock, moving it backwards and forwards.” He adds that the experience left him with “a very strong feeling that there should be significant restrictions on trading during the rights offering period.”


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