View from City Road: Little appetite for rights issues
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Your support makes all the difference.THE recent bounce in the stock market in the wake of sterling's devaluation and hopes of recovery have given rise to talk of a rights issue avalanche so companies can rebuild their ravaged balance sheets in preparation for the upturn. The signs are, however, that many companies will sell businesses rather than call on shareholders for more funds.
Last year companies raised more than pounds 10.1bn, more than double the total for the previous year, pointing to opportunities for expansion as the market recovered. But since then the economy has worsened and much of the money from investors has all but disappeared, swallowed up by interest payments, write-offs and mounting losses.
The recovery in the market means fewer companies are suffering the embarrassment of being valued at less than the amount they raised. Those that have suffered are mainly in the bombed-out construction sector, such as Costain, YJ Lovell, Higgs & Hill and Regalian Properties. But shares of many others - such as British Aerospace, Trafalgar House, Hillsdown Holdings, Ladbroke and P&O - are far below their rights price.
That has punctured institutional enthusiasm for rights issues and made them far more selective about which they will support. So far this year, less than pounds 2bn has been raised, and few are seriously expecting a sudden flood. Institutions now expect good reasons for a rights issue, such as an acquisition, rather than vague comments about taking advantage of opportunities that may arise, which have too often turned out to be euphemisms for paying off debts. The disasters of the last year have also convinced them of the need for reputable non- executives who will watch what happens to the money.
The recent market run has pushed yields down to an average of 4.6 per cent, compared with this year's high of 5.3 per cent. For companies, that has made shares a more attractive financing option. But institutions are likely to demand big discounts from those issues they are prepared to support. The rest can at least console themselves that interest rates are finally falling.
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