Giles Parkinson
Cut-throat capital raising
The debacle surrounding the $2 billion capital raising by Commonwealth Bank gives an insight into the cut-throat nature of the world of investment banking.
It’s always been a highly competitive environment. But when you add three key features of the current market – skittish investors, companies in need of capital, and bankers hungry for a fee-making opportunity, then someone is likely to get hurt.
Ever wonder why there are so many leaks about an upcoming capital raising? Sometimes fund managers can't keep their mouths shut, other times it is quite deliberate. The euphemistic term used in investment banking circles for this is “managing underwriting risk.”
The share price falls and the company is forced into a trading halt. There, it finds itself backed into a corner. Amid the financial dislocation of the last few months, some companies have had no choice but to go to the market, but at a bigger discount. And the greater the discount means less risk for the underwriters.
CBA also found itself over a barrel Wednesday morning, but for different reasons. Funds managers were furious that they had not been told about an increase in the bank’s bad debt levels until after they had agreed to buy $1.65 billion worth of stock at $27 a share in a placement managed by Merrill Lynch, which had previously sold some $350 million of stock at $28.37 under another share sale. They demanded an explanation. Some wanted their money back.
The CBA board held an early morning crisis meeting about its options. But UBS was already at work. Fund managers say UBS was telling investors they could obtain a cheaper price. They say UBS effectively ring-fenced a large part of the market – the sanitised term is “pre-marketing” – and went to CBA, telling the bank it could get the stock away at $26. UBS denies this, and says it only spoke to investors after being mandated by the client and Merrills had been terminated.
A deal with Merrill was no longer tenable. CBA terminated both the placement and the volume weighted average sales price program, accusing Merrill Lynch of failing to inform potential investors of various disclosures by the bank.
But CBA had committed itself to the market. It had effectively had no choice but to go ahead with the raising, and UBS held all the trump cards.
A deal was concluded, UBS got quick approval from HQ in Europe and pressed the button on the raising. Merrill Lynch had filled its mandate the previous day in just over an hour (60 minutes of madness, December 17) but it took UBS less than half the time.
The investment bank presented investors to what is known as a “fill and kill” style capital raising. It’s a first in, first served auction. You bid, you get. There’s no time for hesitation, and no time for due diligence.
The $1.65 billion capital raising began at 11.25am and was complete by 12pm.
Some funds managers refused because of concern about the secondary market for this stock, and because they were still angry about the aborted first issue. Others dived in to get stock at an even steeper discount.
The debacle has cost CBA shareholders some $60 million. That’s what’s the difference in pricing terms means – either by less money coming in from the same number of shares, or the dilutory effect of the extra shares issued to make up the $1.65 billion.
It will also likely cost them an extra $20 million in fees, at least. The Merrill placement was not underwritten, so would have likely carried a fee of 0.75 per cent to 1 per cent, or up to $16.5 million. The fate of that fee will end up in the hands of lawyers. More billable hours.
The UBS placement Mark II was fully underwritten. That will attract a fee of around 2 per cent, or $33 million. Under the circumstances, they might have been able to squeeze a little extra out of the deal.
It capped a remarkable 24 hours for the UBS team, following the underwriting of ANZ’s $1.4 billion DRP and the $300 million placement for Crown. In doing so, it is sure to retain the top spot on the Australian ECM table for 2008. Not that investment bankers say they pay much attention to such tables. Unless, of course, you are No 1.
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