Getting rid of share placements

[jonojpsg]

Hey all, just read an article by Terry Mcrann in the Weekend Australian positing the idea of getting rid of share placements. He made some pretty convincing arguments about the unfairness of companies being able to simply issue shares at their fancy and how they should change regulations to make rights issues the standard way that companies have to raise money.

Interested in people's thoughts and whether it's something worth lobbying gov't about - or do the vested interests in finance simply have too much sway?

 

[Buckfont]

I thought Terry McCrann operated out of the Daily Telegraph/Sun Herald, last time I looked at that paper, ie 1/2 an hour ago.

It `d be an interesting article if you could send the link.

 

[Bill M]

Hey all, just read an article by Terry Mcrann in the Weekend Australian positing the idea of getting rid of share placements. He made some pretty convincing arguments about the unfairness of companies being able to simply issue shares at their fancy and how they should change regulations to make rights issues the standard way that companies have to raise money.

Interested in people's thoughts and whether it's something worth lobbying gov't about - or do the vested interests in finance simply have too much sway?

I totally disagree with any Government intervention with this. I picked up a lot of rights issues through 2009 because I was a loyal shareholder for many many years and when everyone else was dumping I was buying my rights. It is good for long term share holders who believe in the company they invested in. Rights issues to them is a not only good for the company needing cash but also good for us who held on through thick and thin, to me it was a little bit of cream for a hell of a lot of pain that we suffered during the GFC.

 

[So_Cynical]

I totally disagree with any Government intervention with this. I picked up a lot of rights issues through 2009 because I was a loyal shareholder for many many years and when everyone else was dumping I was buying my rights. .

The Issue here Bill is those 1 off share placements when the loyal holders are diluted by institutional placements that don't include a rights issue etc.

 

[doctorj]

I'd be interested in seeing the article to see why they believe private placements should be stopped. It can be frustrating and can feel like others are getting a free ride on your dime, how else can a company respond quickly to a capital need? Public offers, even rights issues are costly, take a long time and you're never really sure how much money you're going to get (or even more costly if underwritten).

Ideally, a company should have a good corp governance structure to protect individual shareholders from unfair treatment. If not, why invest in the company in the first place?

 

[So_Cynical]

As a long term holder and dividend yield chaser..Company's that do not do private placements rank very highly on my stocks to hold list....i absolutely respect company's that respect me as an investor.

 

[nunthewiser]

And sometimes.

No placement ............No Business...........100% loss for holders

 

[SmellyTerror]

GFC2 comes along and finance dries up - what then?

You're screwed, that's what.

Happy to see the article to see what he suggests as an alternative, but without an alternative it's just populist whining.

Whining in The Australian? Get the hell out of town!

Or maybe the new model is "government will just bail us out!" That'd get my vote! I've got way too much money and I'm just looking at a way to make a big bonfire out of it.

 

[freddy2]

Perhaps placements are a neccessary evil in some cases but in most cases it is just another method investment bankers use to fleece small shareholders.

The UK has much better rules and regulations in this area, whereby renouncable rights issues are the standard method to raise capital. If you have time read here.

 

[Bushman]

And sometimes.

No placement ............No Business...........100% loss for holders

Agreed. Placements are needed when the **** hits the fan and companies need access to working capital quickly.

Without placements, a lot of companies would have gone to the wall in the GFC.

Ideally companies will use the rights issue process to ensure retail investors are not diluted. But, as others have mentioned, the complaince costs and timelines involved mean these are clumsy instruments that might not get a company out of a tight cashflow squeeze.

Investors can counter this by voting with their capital and investing in companies with sound cash flow and capital management track record and a committment to delivering a transparent investment process (i.e. they do not need to make use of placements). However, for some sectors with high cash burn rates and volatile pricing (mining stocks) or high debt loads (A-REITs), placements have at the very least protected some capital for investors.

If a rights issue is not 100% subscribed and not underwritten, then there is also less certainty about the amount of capital that will be raised. Take-up rates when the markets are tanking can be problematic. If underwritten, then there are usually substantial costs involved.

Interesting topic. Thanks for raising.

 

[freddy2]

Agreed. Placements are needed when the **** hits the fan and companies need access to working capital quickly.

Without placements, a lot of companies would have gone to the wall in the GFC.

Ideally companies will use the rights issue process to ensure retail investors are not diluted. But, as others have mentioned, the complaince costs and timelines involved mean these are clumsy instruments that might not get a company out of a tight cashflow squeeze.

Investors can counter this by voting with their capital and investing in companies with sound cash flow and capital management track record and a committment to delivering a transparent investment process (i.e. they do not need to make use of placements). However, for some sectors with high cash burn rates and volatile pricing (mining stocks) or high debt loads (A-REITs), placements have at the very least protected some capital for investors.

If a rights issue is not 100% subscribed and not underwritten, then there is also less certainty about the amount of capital that will be raised. Take-up rates when the markets are tanking can be problematic. If underwritten, then there are usually substantial costs involved.

Interesting topic. Thanks for raising.

Is there any evidence to support the points you have made? How many companies in the UK went bust because they had to make a renouncable rights issue instead of a placement? Perhaps Australian companies wouldn't have been in so much trouble if they knew in advance placements would not be available to the extent they are now.

 

[Bushman]

Is there any evidence to support the points you have made? How many companies in the UK went bust because they had to make a renouncable rights issue instead of a placement? Perhaps Australian companies wouldn't have been in so much trouble if they knew in advance placements would not be available to the extent they are now.

It is a moral hazard but in the long-run it is up to investors to do their research and support those entities without a track record of burning retail investors when it comes to the crunch. A 'top down' approach would also benefit investors in recognising that they are invested in a high risk sector that could be subject to an acute cash flow squeeze given credit market or commodity market volatility.

Evidence is problematic given you are dealing with a 'what if' scenario. The best case study would be the A-REIT sector with the argument being that some capital was protected given the high debt load of the sector. Without the benefit of capital raised, there was a very real possibility of an asset 'fire sale' resulting in a 100% loss for equity holders given high debt loads.

Believe me; the onus should be on management to protect all investors best interests and offer rights issues rather than placements to raise capital. But if it comes to the crunch then placements are a necessary evil for retail investors.

It is the game we play so you should know the risks.

 

[Bill M]

The Issue here Bill is those 1 off share placements when the loyal holders are diluted by institutional placements that don't include a rights issue etc.

Yes I agree, I was very nervous when some placements were made and there was no mention of how the individual shareholders were going to be dealt with. Eventually all the companies I had did make an offer to us little guys as well which I was happy about.

You guys are right, when some of the big boys needed the $$$ the insto's and super funds were ready to commit $2 Billion within 24 hours of being asked for it, no problem. It is quick and easy, as for the individual holders it can take up to 2 Months before they extract the $$$ out of us. Printing Prospectuses and having the lawyers go over it and ASIC to check it all over does take time, this could be in our best interests too.

 

[jonojpsg]

Good to see some discussion of this Link to article below

http://www.theaustralian.com.au/business/opinion/share-placements-must-be-banned-by-legislation/story-e6frg9if-1225852024722

Agreed that cap raisings saved the bacon of a number of companies last year but McCrann argues that this was done using share placements rather than rights issues because the system promotes placements as the preferred method by making rights issues cumbersome and costly.

He argues, and I believe validly, that if renounceable rights issues became the preferred method and legislation was changed to enable this and make it effective, that all shareholders would be equally treated and the amount of capital raised would be certain because those who did not want to take up their rights could sell them to people that did.

Sounds reasonable to me - I'm going to write to an MP with this and see what they say