Be cautious about new rights issues

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March 2, 2009
CAI JIN
Be cautious about new rights issues
By Lee Su Shyan , ASSISTANT MONEY EDITOR

INVESTORS must be feeling a bit under siege these days with companies rushing to tap funds from rights issues. That basically means asking investors to buy new shares in the firm, usually at an attractive price. It allows the company to load up on cash without going cap in hand to banks, which are not keen on lending any way.

About 18 rights issues have been completed or announced in the last few months, raising a whopping $8 billion in total. The bulk of that can be accounted for by DBS Bank, CapitaLand and CapitaMall Trust. These calls on the retail investors' purses come just as most are reeling from massive falls in their portfolios - paper or realised - so they are not inclined to cough up more money. And that is assuming that they have the ready cash to invest more.

This is why the discounts on the share prices are so attractive. Even taking into account the depressed share prices before the rights issue was announced, DBS Bank offered a 44.97 per cent discount on the new rights shares. Smaller firms like Metax Engineering offered a 47.62 per cent discount while Global Voice dangled a 40 per cent discount.

But many investors hold a wide range of stocks, not just one or two counters.

The latest to open for subscription is CapitaLand. The property giant is widely held and has about 60,000 shareholders. It is raising $1.8 billion from a one-for-two rights issue at a 45 per cent discount. Shareholders will subscribe because of the dilution risks - their stake in the firm goes down proportionately once more shares are issued, so it is in their best interests to buy more shares. The discount is also very attractive, so few shareholders will want to pass up such an opportunity.

CapitaLand is raising money to give it greater capacity to pursue tactical and strategic growth opportunities. So the question should be: Will putting an extra few thousand dollars into CapitaLand's hands deliver a better return to investors than putting it somewhere else? The answer, possibly, is yes. Putting it in the bank yields something below 1 per cent; putting it with CapitaLand will most likely give it a much better dividend yield.

But, equally, there are many companies out there which may have made poor business decisions and need to boost their balance sheets with more capital. So investors have to exercise caution when deciding to put more money into a rights issue amid a plethora of choices.

Meanwhile, banks are very careful about lending and bank facilities are likely to remain tight for the next few months.

Even CapitaLand says that one of the reasons for the issue is to 'pre-emptively enhance the group's financial flexibility' - which probably means if funds dry up elsewhere, they will have funds at the ready. As a result, there is going to be a further rash of rights issues on the horizon with companies turning to shareholders with outstretched hands, asking for funds to tide them over.

Even if the need for cash is not that dire, companies will be seeking the first-mover advantage before markets run dry and investor fatigue sets in.

What may further increase the number of rights issues are the recent changes to rules by the Singapore Exchange (SGX). Indeed, it may be that the SGX has made it too easy for companies. It will now allow them to double their share capital, once they have got the general mandate given every year at shareholder meetings. There are some restrictions, but it is almost like blanket permission to issue shares and severely dilute existing shareholders.

Coupled with other measures, such as being able to offer shares at a larger discount more easily, investors can argue that the odds are weighted against them. Shareholders who have already been hit by the market crash have enough to worry about, but it is in their best interests to ensure that companies do not find it too easy to raise money.

sushyan@sph.com.sg

Cai Jin runs every Monday and covers financial matters and corporate governance issues that can affect investors. The two Chinese characters marry wealth with good fortune - the two crucial factors that any investor needs to prosper.

Even if the need for cash is not that dire, companies will be seeking the first-mover advantage before markets run dry and investor fatigue sets in.