Follow-on offerings and private placements

Question 1

what’s the reason for traditional rights issue having preemptive rights for existing shareholders?

Answer 1

was thought of historically to satisfy large European family conglomerates.

Question 2

What is the length of a traditional rights issue?

Answer 2

3 months now in order to allow European issuers to compete with US ones which are subjected to slimmer regulations.

Question 3

what is the timetable of a private offering?

Answer 3

2-3 months.

Question 4

why do companies look for traditional rights issues? (2 reasons)

Answer 4

-balance sheet restructuring or liquidity distress (price down after announcement)
-opportunistic issue to pursue a new project
(price up after announcement)

Question 5

what are the shareholder purchase options when a right issues is announced?

Answer 5

-taku up full rights: investors receives rights and subscribes in full
-tail-swallow: cash neutral strategy, the investors sells some of his rights on the market and subscribes using the proeeds from this sales
-sell nil-paid rights: sell all the rights and cash the proceeds
-full sell: the investor sells all nil paid rights and existing shares and cashes all ( done in case they did not support the issuance in the first place)

Question 6

________ are traded separately from shares on the market for a certain period of time before a rights issue.

Answer 6

nil-paid rights to purchase new shares.

Question 7

what is included in the press release announcement for a rights issue? why is it important?

Answer 7

-size of the issue eg 100M
-approval in EGM within X (usually 30) days
-underwriters for the issue
Announcement is usually done on friday evening
-it’s crucial and cannot comtain any error to avoid future market mistrust

Question 8

what is underwriting in volume?

Answer 8

underwriting for a certain sale for its volume as you don’t know the number or price of sale. (eg 100M underwritten, it could be 1M shares at 1$ each or anything else)

Question 9

what is the press release elements after receiving nulla osta/ approval by CONSOB/watchdog institution for a rights issue?

Answer 9

-announcement of nulla osta
-volume of issue (eg 100M)
-# of newly issued shares (eg 250M)
-PPS (eg 40 cents)
-subscription ratio (eg 1:2 meainig you need 2 rights of purchase for 1 share)

Question 10

what is TERP? what does it measure? what’s the formula?

Answer 10

theoretical ex-right price, it measures the theoretical price of the shares after the purchase right for new shares will be detatched (ex-right price) (after nulla osta). it is the weighted average PPS of newly issued and existing shares using issue price and market price and, as weights, # existing shares and #newly issued shares.

Question 11

what is the difference between the drop in price happening after the initial announcement of a restructuring related issuance and the drop after the annonucement of nulla osta with details on the rights issuance?

Answer 11

the initial drop is “real” as the company is essentially communicating a drop in future earnings.
The second drop is a purely structural one given by dilution and the possibility to independently trade purchase rights.

Question 12

what is the market price of purchase rights?

Answer 12

(TERP-subscription price)*(new shares/shares outstanding)

Question 13

what discount is applied to newly issued Rights issuance shares? why is it common?

Answer 13

discount to TERP. because an high discount to TERP hedges the global coordinator against the possibility of falling to RUMP, ensures rights have enough value to circulate liquidly and promote existing investors to participate in the capital increase.

Question 14

what is average discount to terp? what about in M&A context?

Answer 14

usually 36%, it is usually lower in the context of M&A transactions (26%)

Question 15

how much time do you have to exchange and exercise the rights on the market?

Answer 15

4 weeks divided into
first 2 weeks: trading
about 1-2 weeks: subscription
last days: recirculation and rump

Question 16

what is the RUMP?

Answer 16

they are the unsubscribed share of the outstanding rights, usually must be purchased by the global coordinator in the form of an hard underwriting.

Question 17

what instrument does the purchase right replicate?

Answer 17

a call option with strike price “issuance price” and maturity circa 4 weeks.

Question 18

what does “pre-committed by core holders”? why is it important in fee calculation?

Answer 18

is the share of the total deal that core shareholders, through an irrevocable statement, announce will surely be subscribed through the rights. it is important for fee calculation because the % of fees going to global coordinator will be based only on the % of the deal which is not irrevocably subscribed (market risk).

Question 19

why do rights usually trade at a little discount wrt expected price?

Answer 19

-transactions costs
-buying a share gives you immediate exposure while buying rights only gives you exposure in 1 month.

Question 20

what is recirculation period?

Answer 20

rights that were not exercised (people die and forget usually 2-3%) are recirculated

Question 21

why does RUMP result in a loss?

Answer 21

usually if the right is out of the money (and rights are not exercised) RUMP represents a very large share of the total rights which must be exercised by the bank (resulting in a large loss depending on the current market price). Additionally given the large volume of options exercised, exiting the position implies that the sale happens at a price lower than market further amplifying the total loss.

Question 22

is the underwriting position hedgeable?

Answer 22

not through traditional means as this would be illegal. the way you can reduce your exposure is through sub-underwriting.

Question 23

a rights issue offers an __________ position for the existing shareholders

Answer 23

economic-neutral. Attention, it is dilutive in terms of voting rights!

Question 24

what is ABO? How much does it take?

Answer 24

Accellerated bookbuilt offering with voiding of pre-emptive rights. 20% (max) of share capital is sold to institutional investors. requires little to no documentation, and only requires approval of EGM for more than 10% of shares. takes 2-3 days.

Question 25

what is a private placement?

Answer 25

10-15% of share cap issued towards a small group of institutional investors. While the new issuance of shares has to be approved by EGM this requires no further documents (no prospectus).

Question 26

what are pros of accellerated bookbuilt offering?

Answer 26

fast and easy, no EGM approval needed. wall crossing procedure should improve price efficiency. limits participation to institutionals.

Question 27

what are cons of accellerated bookbuilt offering?

Answer 27

-existing shareholders cannot participate (as they vacate preemptive rights) and the issuance is dilutive -capped at 20% of share capital before requiring prospectus

Question 28

what are pros of rights offering?

Answer 28

-economically neutral for existing shareholders -usually underwritten by bank syndicate -longer timetable allows marketing effort

Question 29

what are cons of rights offering?

Answer 29

-needs a full prospectus and logistic exercise -long time before proceeds flow into the company's BS -recycling and marketing of rights might be cumbersome for existing shareholders

Question 30

pros and cons of setting a high subscription price (low discount to terp)

Answer 30

while it can be viewed as a sign of confidence and strength of the issue it may hurt the circulation of rights (as they have low value), additionally if the market is weak and the ex right price falls under subscription price the underwriter risks falling to RUMP.

Question 31

pros and cons of setting a low subscription price (high discount to terp)

Answer 31

existing shareholders participate in the cap increase, reduces risk of falling to rump and facilitates circulation of rights. causes higher OWNERSHIP dilution for existing shareholders (because more shares must be issued to reach size objectives), could be seen as lack of confidence if too substantial.

Question 32

does discount to terp impact EPS and trading multiple? what about dilution of voting rights?

Answer 32

NO, when it comes to voting rights, while the dilution is related to the amount of shares issued, a high discount to TERP would imply a larger number of shares being issued--> is related to dilution of voting rights.

Question 33

what is wall crossing procedure?

Answer 33

a procedure through which you engage representatives of large investors, make them sign an NDA, negotiate the deal and get a large preemptive commitment before going directly to the market. this helps build momentum. usually after getting commitments you launch the trade on the US market, keep the book open overnight, and close it in the morning in Europe.

Question 34

what happens in case of a no-go call after the wall crossing procedure?

Answer 34

Cleansing procedure. the bank commits not to proceed with the transaction for some months and the investors engaged in wall crossing commit not to trade the stock for the same period of time as they have confidential information.

Question 35

is ABO limited to primary issues? how can the bank approach the sale (3) ?

Answer 35

no, already existing shares can be sold through ABO. in this case, either the underwriter purchases and resells the shares on the market (at a discount). in this case a lot of banks are called in and the mandate is awarded to the one requiring the lower discount. Or through an agency ABO, the bank sells the shares on a best effort basis (without underwriting commitment) and requires fees up to 30 bps. in this case less banks are contacted as the exercise requires close coordination. usually at discount with respect to the previous close. third option is a backstop where the bank grants a certain share price on the market, they bear the losses if they do not manage to sell all shares above that level. if they sell above the backstop price profits are shared on a pro rata basis established in the agreement. usually preferred to full underwriting due to profit sharing.

Question 36

2008 case. what happened after GS received the government 10B injection? why didn't GS raise capital on their own then?

Answer 36

price stabilized in the 60-70 pps range. It was literally impossible, there was no trading in the market and no one wanted exposure.

Question 37

2008 case. what was the term that goldman insisted on negotiating when they accepted the injection?

Answer 37

they wanted to be able, subject to fed approval, to repay the equity to the state in order to remove them from the ownership.

Question 38

2008 case. what private placement deal did they negotiate with BH? what was market reaction?

Answer 38

5 billion loan perpetual with a 10% yearly coupon and possibility to early repay at 110% of 5B. Additionally, 5B dollars of no maturity warrants with strike price 115 per share. the market price quickly rosa above 115 pps.

Question 39

what did GS do after the price rose in the aftermath of the BH deal?

Answer 39

they raised an additional 5.75 B at 123 pps with an ABO and repaid the government with the 2 proceeds. the share price rose further.

Question 40

what was the final step required to entirely close the position? what is the final meaning?

Answer 40

close the position with BH, this required a repayment of 5B +10% and coupon of 10%, from 5B they made 1B+1B(to repurchase the warrants) in 5-6 months. PRIVATE PLACEMENT IS USUALLY COSTLY.

Question 41

what are market driven convertibles?

Answer 41

they are bonds with incorporated call options. as you are not forced to purchase shares at maturity they pay a lower coupon compared to straight debt. (the call has a lot of value)

Question 42

are convertibles sold at premium?

Answer 42

in gergon they have a premium, as the strike price is set above market price. However they are still subject to a discount as they are only exercised if they are in the money.

Question 43

what are mandatory convertibles?

Answer 43

they are bonds attached at a forward sale of shares. given the lack of optionality they pay a larger coupon compared to normal debt to compensate.

Question 44

what is regulatory contingent capital? what is their issue? how did they circumvent this problem?

Answer 44

it is an instrument that automatically converts in capital at current market price if capital ratios fall under a regulatory threshold. they tend to perpetuate share price drops. by removing automatic conversion and dictating an automatic write off of the debt (usually 40%).

Question 45

what's the relationship that ties ex-right share price and rights price?

Answer 45

issue price + value of #rights necessary to purchase 1 share= ex-right share price.

Question 46

what are the 2 possible process alternatives for a private placement? what are their differences?

Answer 46

narrow/informal vs broad/formal. the first limits the process to a very small group of investors, these undergo management presentation and due diligence. no private placement memo required. the second engages a large list of investors who are contacted to gauge interest in the deal and made to sign an NDA before negotiation. a private placement memo is drafted and distributed to interested parties to then proceed to management presentations and due diligence.

Question 47

what are the 3 workstreams in a private placement deal?

Answer 47

preparation consisting of due diligence and legal documentation. positioning consisting of equity story and valuation marketing consisting of investor selection and negotiations