Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21
Bitcoin Halvings Price Forecast and Stock to Flow Analysis - 18th Jul 21
Dell S3220DGF Unboxing and Stand Assembly - 32 Inch 165hz Curved Gaming Monitor Amazon Discount - 18th Jul 21
What Does The Fed Mean By “Transitory Inflation” And Why Is It Important To Understand? - 18th Jul 21
Will the US stock market’s worsening breadth matter? - 18th Jul 21
Bitcoin Halving's Price Projection Forecasts Trend Trajectory - 18th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Shareholders Beware! Corporate Rights Issues Could Lose You Money

InvestorEducation / Investing 2009 Feb 17, 2009 - 09:25 AM GMT

By: MoneyWeek


Best Financial Markets Analysis ArticleThere's about to be a rush of companies issuing new shares. And it could well be a trap for investors.

Companies use rights issues to try to tap their shareholders for cash by offering them first dibs on new stock offerings, normally at a chunky discount. And some analysts reckon this dash for cash is a harbinger of better times ahead. (More on that bullish view in a minute).

But this means more shares around - in markets already in dire need of help. Further, with many businesses so short of money, shareholders' funds are a last resort.

Don't get caught out by companies in trouble…

Companies across the continent rush to raise cash

Interesting. Here we are in the middle of a big bear market, yet according to Bloomberg the supply of shares in Europe is actually increasing for the first time since 2005. Some firms like zinc producer Xstrata and ceramic linings maker Cookson have already said they're raising extra cash by selling more stock this year. It could be the start of a major trend. Goldman Sachs forecasts that companies across the continent are looking to raise some €300bn in 2009.

"Some of Britain 's biggest companies including Lakeside owner Liberty International and bookmaker William Hill will announce rights issues to raise billions of pounds within the next few weeks", says the Sunday Telegraph's Garry White , with Hovis and Mr Kipling cakes owner Premier Foods "planning a £400m rights issue alongside its results".

Rights issues: what should we make of it all?

Several analysts think the imminent cash raising rush is a bullish sign. Looking at European companies with rights issues over the past decade, 72% of them improved their share prices in the next six months, says Royal Bank of Scotland . "Rights issues contain the seeds of their own success", says Gartmore's Adam McConkey, "improving prospects will see a significant improvement in the share price". And Raiffeisen Capital's Norbert Janisch says: "if a company gets into a position where it needs a rights issue, if it acts swiftly, the outcome can be positive".

Sorry to pour cold water on all this optimism, but pull the other one.

UK companies are right under the financial cosh at the moment. As we pointed out in this week's cover story week: Seven companies that will prosper in the recession (If you're not a subscriber, get your first three issues free here ) the latest numbers from the Bank of England showed that business cash is fast running low.

Corporate bank deposits dipped by nearly 5% in 2008 and the speed of the decline is accelerating. The year's final quarter saw a near-2% drop, the biggest fall since the Bank's records began over ten years ago. With the recession getting tougher, business cash balances can only get even thinner.

Rights issues are the last resort

So why are all these companies rattling the tin in the direction of shareholders now, rather then when their shares were two to ten times higher? (No misprint – Premier has plunged over 90% within the last two years.)

Either their corporate advisers didn't think of the idea a lot earlier, in which case they should be sacked, or the companies themselves weren't quite so desperate for money then. Or maybe both. But the need for money must be becoming pretty serious.

And why don't these companies have a bash at raising the cash elsewhere? Presumably the banks won't play ball – after all, they've enough troubles of their own without having to worry about the tedious business of lending to customers – but isn't there talk of investors supposedly showing a renewed appetite for corporate debt?

Some firms have managed to refinance their balance sheets by borrowing in the bond market. But it's not exactly been easy. They've had to pay top dollar for the money. What's more, the market's getting more nervous again – and much more selective. Virtually unnoticed, the cost of insuring against non-payment by some of the riskier corporate bonds has jumped in the last week almost back to its all-time high of two months ago. Default fears are back in a big way.

It all adds up to rights issues being more or less the last resort. And while companies that do succeed in cadging some extra cash off their shareholders may see a short-term share price bounce, it's often driven by relief that these firms won't be running into more trouble for the moment. And in this market, rallies soon fizzle out.

How to make sure you don't get caught out

So what should you do if one of the companies in your portfolio offers you an apparently tasty opportunity to 'snap up' some new shares at a big markdown on the current price?

Be very careful. Don't be tempted just by the discount. It may look large just after the rights announcement, but then the share price could well drop back a long way. If you think the company's in good nick, and isn't in dire need of the extra cash, it might still be worth subscribing for the new stock. But if the firm's finances were looking dodgy pre-issue, it's probably best to dump the shares anyway. In that case, if the price rises on news of the rights, cash in by getting out.

And for an example of how wrong things can go, remember HBOS. Its £4bn July 2008 rights offer made history by achieving the lowest take-up in Europe this decade, as shareholders claimed only 8% of the stock on offer after the shares fell below the rights price. Not only did the bank nearly go bust then, it's now dragging down Lloyds as well.

Don't get caught out like that...

By David Stevenson for Money Morning , the free daily investment email from MoneyWeek magazine .

© 2009 Copyright Money Week - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Money Week Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in