In announcing its £12 billion rights issue, it seems that the Royal Bank of Scotland loosened the tap of rights issues in the UK market. Given where we are in the current environment, will this trickle turn into a flood? By way of reminder, rights issues are a means by which listed companies can raise extra capital by going to their shareholders and offering them new shares on a pro rata basis – and, most importantly, at a discount to the current market price by way of incentive.

Shareholders then have a number of options. If they are still convinced by the long term prospects for the company requesting the cash, they can take the offer up in full. If, however, they are unwilling or unable to commit any further cash at the current time, they can allow the rights shares to 'lapse', which means that the company will send a cheque to them in due course (rights shares have their own intrinsic value), although in this scenario, the shareholding will be diluted – that is, other investors will have bought their shares in the market and, as such, the shareholder will have less of a stake in the company than before. There is also another option, known as 'tail swallowing, whereby the shareholder sells enough of the rights to be able to take up the balance, thus only partly diluting their holdings and not actually parting with any additional cash.

Another manoeuvre which is similar to a rights issue (with much the same end result to the company) is known as a placing, whereby new shares are offered to certain shareholders in larger blocks, at a price which will usually be nearer to the current price than a rights issue (less of a discount) and in general the shares will be offered to the larger institutional investors of a company as opposed to individuals.

Apart from the RBS rights issue, there has over recent weeks been a fair amount of activity – both HBOS (£4 billion) and Bradford & Bingley (£300 million) have also announced rights issues, and just over the last week a number of placings have been announced – Johnston Press (£212 million), G4S (£300 million), FirstGroup (£236 million) and Balfour Beatty (£186 million).

So why now?

If there is a general theme running through this rights issue/placing activity, it is that the most recent years of cheap money have lead to companies embarking on acquisition sprees in order to bolster their businesses. In the last few months, of course, the credit market has shrunken significantly and so the availability and cost of credit have become more penal than previously, and since these companies are therefore finding it more difficult to service this debt, they have taken the route of raising capital from existing shareholders in an effort to reduce their own borrowings.

This is not the entirety of the reason – whilst RBS for example, clearly has its work cut out following the acquisition of ABN AMRO last year, it (along with the other banks) has also had its capital strained by capital writedowns following the US sub-prime fallout and the additional pressure of needing to maintain capital ratios on the balance sheet (the amount that the banks are 'legally' obliged to keep in reserve). Other companies have claimed that the likelihood of an economic slowdown in the UK could well present attractive opportunities for them to make acquisitions, and they would rather have the cash to hand in such a scenario than negotiating with the banks for credit during more testing times.

On the positive side, there are estimates that there could be some £100 billion of cash waiting on the sidelines to be invested by the largest UK institutions and therefore there remains a 'market' for companies to tap, whether or not it chooses to involve individual private investors.
Psychologically also, it is usually better to be at the front of the queue than the back when going cap in hand to investors and so, not only is the current environment conducive to further calls for cash, but these are likely to come along sooner rather than later.

Watch this space. 

Richard Hunter, head of UK equities at Hargreaves Lansdown

Search ISAs

Search SIPPS

Search funds

---

Tag this article :