04/12/2020

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U.K. Finance Split on Case for Extending Crisis Capital Measures

(Bloomberg) — U.K. bankers and investors are split on whether emergency measures that are making...

(Bloomberg) — U.K. bankers and investors are split on whether emergency measures that are making it easier for companies to raise much-needed capital during the coronavirus crisis should be extended beyond the summer.

Financial standard-setters recommended in early April that shareholders support U.K.-listed companies that want to sell as much as 20% in new stock — double the usual ceiling — to ease themselves through the pandemic.

U.K.-listed companies including Informa Plc, Compass Group Plc and Asos Plc have sold 14.4 billion pounds ($18.7 billion) in additional equity since then, according to data compiled by Bloomberg, a more than threefold increase on the same period in 2019. The 20% cap is due to expire on Sept. 30.

“Long may it continue, as it is a useful tool,” Luke Bordewich, a managing director at Numis Securities Ltd., said in a phone interview. “The increased cap on equity placings to 20% has worked well and has been used appropriately to enable companies to raise capital more quickly, easily and cheaply in this time of crisis.”

Red Tape

In normal times, U.K. companies can raise as much as 5% of issued capital, and an additional 5% for targeted specific investments, without seeking full shareholder approval. Larger deals typically require the green light from investors who would otherwise see holdings diluted by a sudden flood of new stock.

A decision on whether to extend the 20% crisis measures is due from the Pre-Emption Group — a panel of executives from investing, business and banking sectors — in the coming weeks and some in the City of London are keen to avoid a return to the red tape of standard fundraising protocols while the pandemic persists.

The costs to companies of issuing and pitching a full prospectus for a large capital raise that requires the green light from investors were in a “different league,” Bordewich said. The process can take weeks, not days, to get over the line, he said.

The Association for Financial Markets in Europe, the trade body representing banks in the region, has been working with the Pre-Emption Group to help companies raise cash more efficiently during the downturn, according to its chairman Michael Cole-Fontayn.

“Since the limit has been raised there has been a positive effect on equity markets, as evidenced by a marked increase in transactions,” Cole-Fontayn said in an email.

Robust Governance

While the 20% guidance has been largely popular with bankers, who are able to earn fees from advising companies on fundraising deals to help offset a big drop in lucrative initial public offerings, members of the investment community are more concerned about the effects on shareholder rights.

“The extension of the extended cap at this time seems somewhat unnecessary,” said Louise Dudley, a global equities portfolio manager at Federated Hermes Inc., which managed 488 billion pounds at the end of March. “We should be supporting the robust governance frameworks that have already been put in place for occasions such as this.”

A spokesperson for Fidelity International, which managed $565.7 billion at June 30, said via email: “We would not want this to be extended indefinitely and to see pre-emption rights eroded.”

Numis, which has been one of the busiest advisers on London-based deals since the start of the second quarter, has typically been allocating 80% to 90% of new issues to existing shareholders to honor these rights, according to Bordewich.

“Everything will be OK on this score until someone takes a liberty and issues a 20% stake at a 10% discount to an oligarch or somebody that is considered unacceptable, diluting value and control away from existing shareholders,” he said.

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