Small investors miss out as institutions and banks cash in

Capital raisings should all be on a strictly pro rata renouncable basis. To ensure essentially full participation the pricing should be significantly discounted thereby motivating shareholders to either participate or sell their rights which would logically be clearly " in the money " and easily sellable. The significant discount on offer would be entirely fair in light of the issue being 100% pro rata .

I never received notification of the NAB plan. Nothing in my email. Since a full 75% of shareholders didn't apply, I'm wondering how many others there are like me.

Hi Martin, same here, although completed a long time ago, no notice from NAB on how much I have been allocated.

Me too, never received notification of the NAP SPP offer and I would have bought the maximum.
I've complained to computershare. What's going on?

Of course placements are easy and quick. But is this sufficient justification for placements with instos to the disadvantage of the company's owners/shareholders. If there is a sudden and urgent need for an injection of funds by a company this suggests that directors and management may not be as competent as they should be!
Lets hear from the Institute of Company Directors. What does it recommend?

I think it is an outrage that our capital (the discount provided) is given to institutions at retail owners expense. Look at the quantum raised/underwritten for Breville and the pittance left for retailer investors. If the company provides such a huge discount for institutions they should provide it equally to retail investors. I consider it a form of theft from retail investors.

Retail shareholders need to use the ballot box so to speak. Go to AGMs, have the spine to stand up and say your piece, ask shareholders in the room for a show of hands to display their displeasure.
The problem with corporate Australia generally is that it has corrupted the system and seeks to give shareholder wealth to the top end of town. CEOs and Boards get paid obscene amounts of (unjustifiable) money and companies no longer have a show of hands at AGMs. The reason is to hide shareholder, not streamline the system.
Its about time the government we don't have at present did something about this but don't expect anything because its a business controlled entity also working for the top end of town.
Its a tough road for investors and perhaps we need to act in unison and threaten to abandon the equities market if the theft of shareholder wealth does not stop.

As you say, acting in unison is the only way for retail investors to gain any leverage over the big end of town. The shareholders association has to develop teeth, using a campaign that says "small investors matter".

I have participated in two raisings that had allocations this week. In both cases the retail component was not fully taken up, yet over subscriptions were scaled back and the excess shares given to the underwriters. The over subscriptions are required as retail shareholders have already been diluted by the institutional placement that occurred prior to the rights issue. The underwriters, in cahoots with the directors, are just sitting back and taking the shares if they are trading above the issue price. Retail shareholders get screwed.

What angers me is that some institutions got shares even though they were NOT shareholders whereas retail investors, many of whom have held shares for a long time, were scaled back. Why say you can apply for up $30K, when you only get 28%. And, I agree they keep your $30 for several weeks, you can't use it (and interest is lost), and you don't learn how many shares you will get until the SPP closes. And, then to add insult to injury, they don't refund the balance for 2 to 3 days later. In this low interest rate world, the interest lost is insignificant but if rates were higher it would be a further loss to the retail shareholder. It is absolute daylight robbery!

All of my applications to COH, APT and NAB were scaled back. MSB recently had a cap raising but retail shareholders were not even invited to apply. But, I got my full $30k of Reece shares which was more than I held. Well done, Reece!

Here we go again!
We have just spent One Billion dollars, yes that is a 'B', on the Royal Commission and this type of activity still persists.
Where are the so called guardians of all things 'right' and 'good', i.e., ASIC, ACCC, ATO, et al?
No appearance your Worship!
Common-sense, Bi-partisanship, and the Common-good disappeared years ago.
Replaced by, ever present and stronger, Greed is Good!

I have applied for $30k in a number of SPP's. You send off the money and a month later you get 75% of it back but you could do nothing with that money in the interim. Crazy. Qube did the right thing and gave us a guaranteed allocation with an offer to double it. A renounceable rights issue is the fairest and equitable way to go. Who says it needs to take a month. Comptershare, Link and Boardroom obviously know how to set these things up quickly. We live in an electronic world and I assume most people receive all the details by email. We need to get the Government off our backs and say that a rights issue document must be no more than five pages long instead of hundreds of pages that most people do not read. It just needs a statement that says "You own shares in this company so you are or should be aware of what the company does, their dividend policy and their future prospects. If you are unsure, please refer to their website or third party sites that assist with this information."
Then they need to send out the document and close it off five business days later. Bpay takes 24 hours for them to receive the funds. Forget the mail for documents (it soon won't exist for letters anyway) and forget cheques (most companies have done this already). If there are refunds - unlikely if a renounceable rights issue - then they should be made the same day as the shares are allocated. Whatever the system they use, every shareholder should be given the same opportunity. The excuse that they need the money in a hurry is just not valid unless they are a hopeless company and there is no reason why a right issue could not be all over and done with in two weeks from start to finish. It is a series of electronic transactions that are the same for most issues with different figures and electronic transactions are essentially instantaneous.

I agree the number of new NAB shares I got is disappointing. However I got 363 new shares (having held 1299 shares), that is about 28%
What is not disclosed directly is how many new shares were issued in total (ie placements + SPP) compared to how many shares were held prior, but it looks like
88 mill new SPP shares (from the announcement)
212 mill shares from placement (news item, $3 billion placement at $14-15)
2875 million shares prior (actually this is at June 2019)
so this is an increase of 10.4% in number of shares.
(It shouldn't be so difficult to work this out!!)
So really, it is the retail shareholders who didn't apply who are stuffed

How do you know what you got? I have not heard anything and no refund of application money yet received.

Look at your share portfolio. My new shares were in the portfolio on Wednesday 3rd June!

Agree, Charles. Newcrest's SPP closed 10 days ago and there is still no update to my shareholding. They could have had the money for a month with no knowledge of how much we would be allocated and no ability to do anything else with the money. There should be timing response obligations.

Loyalty is a two way deal and it seems that NAB ignored the loyalty of existing shareholders. ASIC seems to be absent in looking after the interests of ordinary retail shareholders. Why do the Institutions get first preference?

Just received notice from Nab that the $30,000 I submitted for the SPP has been scaled back to $7910.
I wonder why I bother!!
At the first opportunity I am out.
Had a gut full of this institutional preference and complicit Directors.

Great to see this issue being covered. I have written to ASIC, a number of Chairman on the totally unfair raising of capital using SPP.
How is it fair that a shareholder with 1000 shares is able to apply for up to $30k of stock under a SPP and a shareholder with a 100000 is limited to the same amount. This discriminates against the larger shareholder as well having the effect of diluting holdings.
The raising of capital should be by pro rata rights issues, this treats all shareholders equally and fairly. In a time such as now when companies need to go to the market for capital they can do so through the use of renounceable or non renounceable accelerated pro rata issues. QUB did this recently and successfully. Well done QUB
Further I am one for not allowing Institutional Placements at all but I know this is absolutely not going to happen.

When a listed entity undertakes a discounted capital raising and which provides unfair access to institutional investors, I interpret this as a lack of respect for retail shareholders, and as sign of incompetence by the board and senior management, that they have got themselves into the position that capital must be raised urgently. Whilst such raisings typically provide short term opportunity, they also indicate that the company is not worthy of a long term hold and that the shares should be opportunistically sold.

Peter

I think length of ownership is poorly recognised in addition to the inequitable allocation between instos and retail. As an example we have held NAB shares for 15 years plus through thick and thin, always participated in SPP and rights issues (I clearly remember the one at $28.50/share) and always on DRP. So a very patient capital which surely is valuable for all companies but banks in particular. On applying for $30K and despite the increase on SPP size, you get wound right back to sub 30% allocation. I think some matrix of relative holding to total application plus length of holding is a fairer outcome.
It could be an alternative to make some of the insto raising settlement conditional on retail outcome although no doubt instos would say that this is unacceptable?

For a supposedly free, efficient and mature market, this is really an outrage. ASIC remains asleep at the wheel?

I don't really disagree with any of what has been written here, but it misses the point.

The big concern for most corporates raising money is that they get the majority of the funds locked in as soon as possible. Offering it to institutions first allows that, a corporate can easily raise hundreds of millions or even billions of capital in a couple of hours after the market has closed and their funding is secured, the company has done what it needed to do.

There is also a lot less administration required, the investment banks handling the capital raise talk to a couple hundred institutional investors, sort out the billing and delivering, and you're done. When you raise the money from retail investors, you have to do a lot more admin, you have to send out a bunch of offering docs, you have to setup a facility to take the money in etc, it's a lot more work.

And the reason why investment banks get paid for underwriting the insto placement is that there is a lot more risk there. The company wants the money right now, and it's less certain that insto's will buy into it, so the bank gets paid for guranteeing they will deliver if inst's don't. Retail investors are more likely to participate, particularly if the offer size to them is a lot smaller.

It's not wrong to say that retail shareholders don't get the same offer as instos, but the above are a number of reasonable reasons why.

Yes, I understand the need for speed, but what you do not mention is the discount which the brokers know will be sufficient to make the placement. In some cases, it is 25% or more, and the brokers check with the instos before taking the risk. They then place the deal quickly, and are 'off risk' and taking their fees within a few hours. It's not the level of risk that you imply, and even if the market fell, there is a buffer in the price. And finally, the placement agreement has a 'force majeure' which allows them to step back if conditions change materially.

The brokers should certainly have a pretty good idea of what discount will work, but there's a difference between hypothetical discussions with instos and them putting up cold hard cash when it's actually real, on top of which you wouldn't typically have the whole book covered and you've typically canvassed most of the bigger investors already so you're relying on smaller ones to cover the difference. It doesn't happen often that deals fall through, but it does happen and it's much more likely to happen in times of market stress. And if the market knows that the company couldn't raise money at that price, then the share price should fall to reflect the lack of confidence in the company so there will be pain for the banks.

And if the banks do exercise their force majeure or MAC clause to get out of a deal, they know that they're not going to get any more work from that company again, and probably from most other companies either as you can be sure that every other investment bank will be pointing out that they didn't stand by previous deals when the going got tough.

Obviously every deal will be different and there will be some deals where the risk is a lot less, and some where it's a lot more. Inevitably some of them are going to have the risk mispriced, one way or another.

"...a lot more risk. The company wants the money right now, and it's less certain that insto's will buy into it" - despite being an incredibly volatile market in the last two months, how many placements weren't fully subscribed by insto investors this year? That will give us a pretty good indication of the underlying risk that investment banks were taking on to earn their $300m.

As for the effort/cost required to undertake a SPP when a placement has already taken place, it is a rounding error at best.

If over subscribed, why can't institutional investors also get scaled back after the SPP closes to pre placement proportions of the share registry? That seems equitable.

The placements were fully subscribed presumably because the banks did a good job of sounding out insto's, looking at what discount would be required to get the deal done, and then executing on that with their balance sheet to back it up if things went wrong. The banks got paid $39 mill for the NAB issue but were on the hook for $3,000 mill if it went wrong. That's the price that the company pays for eliminating the risk. Nobody in their right mind is going to underwrite the deal for free.

It's very easy to sit there afterwards and say oh hey the deal went well so they got paid money for nothing. No, they got paid for what happened if things didn't go well. It's a form of insurance, and like all insurance you have to pay for it.

I'm glad that you think sending out the offering documents, setting up a BPay and cheque facility, processing all the hundreds of thousands of applications is a rounding error and presumably super easy barely an inconvenience compared to doing so with a couple hundred institutional investors, I'm sure everyone involved thinks the same.

And if you want to scale back the institutional investors after the fact, then they have a reduced incentive to participate in the offering in the first place and the company doesn't get the tick of approval from the market that they are now fully capitalised and secure. And they are scaled back within the institutional offer anyway, they might put in for fifty mill and only get 10 mill based on a number of different factors.

The simple reality is that all shareholders are not equal when it comes to raising money quickly. The big asset managers, hedge funds, industry super funds etc can all write a hundred million dollar cheque within two hours or even two minutes, and with a hundred phone calls the company now has the funding it needs. The average retail investor can probably write at most a hundred thousand dollar cheque and in most cases far less, most of them won't read their emails or listen to their phone messages etc and will want to have time to think about it. So the company doesn't immediately get the money it needs, it has to stuff around a lot more, and given it's advertised some weakness in that it needs to raise money the share price is likely to get weaker still because it's weak AND there is no guarantee that it will be able to raise the money. This is why companies raise all or almost all the money they need from the institutional market immediately, and have a much smaller retail allocation.

As a retail shareholder I fully agree with the sentiments. However the bureaucratic maze that companies must fight through to carry out fair rights issues effectively rules them out especially when capital is required in a hurry. I would be taking aim at the regulators to make rights issues easier to get away.

And the ASX was quick to agree to double the SPP limit to $30,000 when in the majority of cases, it is meaningless, just in case the instos did not come to the party (at a 25% discount). And then one of the first with cap in hand for capital, Cochlear, has the same Chairman as the ASX. At least they upped to SPP allocation, eventually.

Outlaw SPPs in their current form and return to rights issues. They are the fairest.