3 june 2009...hammerson 609 7 for 5 (62.2%) (39.2%) 140.0% 58.3% 3.25% citi, deutsche debt 29 jan 09...
TRANSCRIPT
IFLR Webinar Series UK equity capital raising: options and examples3 June 2009
2
Panellists
Simon Crompton, Editor, International Financial Law Review
Charles Howarth, Partner, Herbert SmithCharles advises on a wide range of equity and debt capital markets transactions. He has recently advised on rights issues by Hammerson and Bradford & Bingley and on a placing and open offer by Liberty International.
Will Pearce, Partner, Herbert SmithWill advises on corporate finance, M&A and capital markets transactions. He has recently advised on rights issues by Shanks Group, Wolseley and Bradford & Bingley, on the secondary listing of British American Tobacco on the JSE and on the restructuring and refinancing of JJB Sports.
Robert Farrer-Brown, General Counsel, LazardRobert joined Lazard in London in May 2007, prior to which he spent over 8 years in the Investment Banking Legal team at Credit Suisse. In 2009, Lazard has advised on rights issues by Hammerson, SEGRO, Greene King, Cookson, Aquarius Platinum and Great Portland Estates and placings by SIG and SSL international.
3
Initial public offerings slow down …
• Volume and value of and funds raised by UK Main Market initial public offerings has decreased over the last three and half years
In 2006, 59 new issuers were admitted to listing on the UK Main Market with a combined market cap of £21.6 billion raising some £9.1 billion
In 2007, 51 new issuers were admitted to listing on the UK Main Market with a combined market cap of £19.8 billion raising some £7.6 billion
In 2008, 23 new issuers were admitted to listing on the UK Main Market with a combined market cap of £6.5 billion raising some £3.1 billion
In first 4 months of 2009, one small VCT IPO and one step up from AIM to the UK Main Market
Source: London Stock Exchange Statistics, 31 May 2009
4
… as rights issues take off
• Popular in early 1990s, spike of rights issues in 2002 and well and truly returned in 2008
In 1998 to 2007, UK Main Market listed companies completed over 220rights issues raising approximately £34.9 billion
In 2008, UK Main Market listed companies completed 14 rights issues raising approximately £27.1 billion
In first 4 months of 2009, UK Main Market listed companies have completed 14 rights issues raising approximately £21.8 billion
• If 2008 was the year of the banks, 2009 (so far) belongs to the property companies
Source: London Stock Exchange Statistics, 31 May 2009
5
Current drivers for raising equity finance• Varied use of proceeds, but generally debt or acquisition related
• Strengthen balance sheet or reduce debt
avoid triggering debt covenantsregulatory reasons, e.g. bank capital ratiosprovide working capitalavoid asset disposalsrepay maturing debt facilities
• Finance acquisitions, organic growth or other capital expenditure
new debt finance may not be available or terms unattractiverepay short-term acquisition finance
6
Size of Offering Discount % Capital Issued
Date Issuer Value (£M) Weight Gross TERP Existing Enlarged Fee(1) Underwriters Use of Proceeds22 May 09 Mecom 141 6 for 1 (70.0%) (25.0%) 600.0% 85.7% 4.75% JPMorgan, Cenkos Securities Debt21 May 09 Shanks 71 2 for 3 (50.8%) (38.3%) 66.7% 40.0% 3.50% RBS Hoare Govett Acquisition20 May 09 Shaftesbury 158 2 for 3 (52.2%) (39.5%) 66.7% 40.0% 4.00% JPMorgan, Merrill Lynch Acquisition
18 May 09 Great Portland Estates 175 8 for 11 (53.4%) (39.9%) 72.7% 42.1% 3.25% Credit Suisse, JPMorgan Acquisition
13 May 09 Marshalls 37 2 for 5 (46.1%) (37.9%) 40.0% 28.6% 3.25% Citi, Numis Debt11 May 09 Travis Perkins 314 7 for 10 (51.6%) (38.5%) 70.0% 41.2% 3.26% Citi, HSBC Debt11 May 09 Lonmin 316 2 for 9 (44.5%) (39.6%) 22.2% 18.2% 3.25% Citi, JPMorgan Debt08 May 09 3i 732 9 for 7 (60.2%) (39.8%) 128.6% 56.3% 3.25% JPMorgan, Merrill Lynch Debt01 May 09 Informa 255 2 for 5 (48.9%) (40.6%) 40.0% 28.6% 3.88% Merrill Lynch, RBS Hoare Govett Debt30 Apr 09 DSG International 311 5 for 7 (62.7%) (48.1%) 104.7%(2) 51.2%(2) 3.50% Citi, JPMorgan Debt23 Apr 09 Greene King 208 3 for 5 (51.2%) (39.6%) 60.0% 37.5% 3.50% Deutsche Acquisition26 Mar 09 Aquarius Platinum 131 1 for 9 (37.5%) (34.9%) 26.8%(2) 21.2%(2) 5.00% Merrill Lynch Acquisition25 Mar 09 Premier Oil 171 4 for 9 (49.0%) (39.9%) 44.4% 30.8% 3.50% Deutsche, Barclays Capital, HSBC, RBC Acquisition19 Mar 09 Inchcape 249 9 for 1 (88.2%) (42.7%) 900.0% 90.0% n/a Merrill Lynch, HSBC, RBS Hoare Govett Debt06 Mar 09 Wolseley 1,051 11 for 5 (75.8%) (47.1%) 220.0% 68.8% 3.50% Deutsche, UBS, BNP, RBS Hoare Govett Debt04 Mar 09 SEGRO 524 12 for 1 (86.9%) (33.9%) 1200.0% 92.3% 3.66% Merrill Lynch, UBS Debt
02 Mar 09 HSBC Holdings 12,853 5 for 12 (47.5%) (39.0%) 41.7% 29.4% 3.25% JPMorgan, Goldman Sachs, HSBC, BNP, Credit Suisse, RBS Hoare Govett Debt
26 Feb 09 William Hill 365 1 for 1 (57.5%) (40.3%) 100.0% 50.0% 3.50% Citi Debt19 Feb 09 Land Securities 785 5 for 8 (51.0%) (39.1%) 62.5% 38.5% 3.50% Citi, JPMorgan, UBS Debt
13 Feb 09 Beazley 157 9 for 19 (20.7%) (14.9%) 49.5%(2) 33.1%(2) 3.75% Numis Securities Acquisition
12 Feb 09 Catlin 219 2 for 5 (47.3%) (39.0%) 40.0% 28.6% 3.25% JPMorgan, UBS Acquisition
12 Feb 09 British Land 767 2 for 3 (52.5%) (39.9%) 66.7% 40.0% 3.50% Morgan Stanley, UBS Debt
09 Feb 09 Hammerson 609 7 for 5 (62.2%) (39.2%) 140.0% 58.3% 3.25% Citi, Deutsche Debt29 Jan 09 Cookson 255 12 for 1 (88.2%) (36.6%) 1200.0% 92.3% 4.50% JPMorgan, Merrill Lynch Debt29 Jan 09 Xstrata 4,116 2 for 1 (66.3%) (39.6%) 200.0% 66.7% 3.25% Deutsche, JPMorgan Debt27 Jan 09 Workspace 87 5 for 1 (67.7%) (25.9%) 500.0% 83.3% 4.00% Panmure Gordon, Investec Debt
Recent UK rights issues: key terms
Notes: (1) Underwriting Fees; (2) Takes account of placing
7
Three topics for discussion
8
Secondary offerings
• Most common methods of raising equity capital
rights issueopen offerplacingplacing and open offer
• All involve issue of new shares for cash
• English companies with a primary listing need to consider
basic company law requirementsadditional Listing Rule provisionsinstitutional investor expectations
• Difficult decision: which method of raising capital is most appropriate
• Number of factors come into play: pre-emption rights, limits on size of offering and on pricing and requirement to seek shareholder approval
9
Pre-emption rights
• Existing shareholders have right of first refusal in proportion to other existing holdings on further issues of “equity securities” (s89 CA 85, LR 9.3.11)
• “Equity securities” include
shares (including treasury shares)rights to subscribe for shares (e.g. warrants)securities convertible into shares (e.g. convertible bonds)
• Pre-emption rights do not apply to
issues for non-cash considerationshares with fixed distribution for income and capital (e.g. preference shares)shares allotted or to be allotted for an employee share scheme
• Pre-emption rights can be disapplied by special resolution
10
Limits on offering size
11
Limits on pricing of offer
12
Shareholder approval
• Generally approval will be needed
authority to allot sharesdisapplication of pre-emption rights increasing share capitalreorganising share capital to avoid issuing new shares at a discountamendment of articles to incorporate rights of new securitiesapproval of Class 1 acquisitionwhitewash for Code purposes (for strategic investor or underwriter)
• Routine annual approvals will be sufficient for
certain smaller share issuespre-emptive rights issues
• Reduction of notice period for special resolutions to 14 clear days
13
Rights issues
• New shares are issued for cash, often at a substantial discount to market
• First offered to existing shareholders pro rata to their existing shareholding through an offer of renounceable rights to subscribe for new shares for cash
certificated shareholders sent a “provisional allotment letter” or “PAL” setting out how many new shares they are entitled to subscribeuncertificated shareholders have “nil paid rights” credited to their CREST accounts
• Shareholders have a number of options: take-up their rights in whole or in part, “cashless take-up”, sell rights nil paid or doing nothing
• Company makes arrangements for sale of new shares not taken-up (the “rump”) or failing which for subscription by the underwriters (the “stick”)
• Even “lazy shareholder” may receive a cash payment if new shares provisionally allotted to him are sold in the market for more than the subscription price
14
Rights issues cont.
• New shares offered for cash to current shareholders pro-rata to their existing holdings
• Timetable: longer than for a placing or open offer with a typical minimum timetable of 17 days without a general meeting (or 34 days with a general meeting)
• Pre-emption rights: can be structured to comply with s89 pre-emption rights, but more commonly shareholder approval sought to opt out of s89
• Advantages in disapplying s89
fractional entitlements can be aggregated and sold for issuer’s benefitoverseas holders in difficult jurisdictions can be excluded (if not the offer must be made to them via a Gazette notice)shorter offer period in Listing Rules than under s89generally necessary when multiple share classes or convertibles
15
Rights issues cont.
• Main disadvantage in disapplying s89 is additional time required to convene a general meeting (although it may be required in any event)
• Discount: no restriction, deep discounts common
• Prospectus: required as offer to the public and admission to trading
• ABI’s preferred option for large issues (>15% to 18%) and/or deeply discounted issues (>7.5%) due to increased options for existing shareholders
• Short selling during rights issue periods and in anticipation of rights issues can cause problems e.g. HBOS shares fell 40% and an investigation ensued
• Increasing trend for underwriting by major shareholders or new investor instead of or together with investment banks
16
Illustrative rights issue timetablePHASE I - PREPARATION
PHASE II – LAUNCH TO LATEST DATE FOR ACCEPTANCE (ASSUMING GENERAL MEETING ON 14 DAYS NOTICE)
D-28 D-21
Documents submitted to UKLA
D-14
Pre-marketing
D-2
Board meetingto approve the
rights issue
D-1
Certificates for new shares despatched to certificated
shareholders
Company receives balance of funds and non-accepting
shareholders receive premium (if any)
Subscribers procured for the “rump” and sub-underwriters
informed of the “stick”
D+32/33(latest time for placing rump is 2 days
after the close of the rights issue)
Commencement of dealings in new shares fully paid /New shares credited to
CREST accounts
D+31(offer must be open
for min 10 business days)
Latest date for splitting nil paid
rights
D+27
Dealing in the ex rights shares and
nil paid rights commences
D+17(day after EGM)
EGM /PALs despatched
D+16(minimum of 14 days
after posting)
Record date
D+7(usually a week
before the EGM)
Rights issue announcement /Circular posted
D
Latest date for acceptance and payment in full
D+32
PHASE III – COMMENCEMENT OF DEALINGS AND RUMP PLACING
Working capital reviewDrafting of Circular and Prospectus
17
Open offers
• Offer to existing shareholders to subscribe new shares for cash pro rata to existing shareholders
• Shareholders are sent an application form rather than a PAL
• Subscription right cannot be traded and has no value
• No arrangements made for sale of rights and lazy shareholders are diluted and receive no payment
18
Open offers cont.
• New shares offered for cash to current shareholders pro-rata to their existing holdings
• Timetable
10 business days under LSE Rules21 clear days if s89 needs to be complied withif shareholder approval is required, meeting notice period can run concurrently with the offer period
• Pre-emption rights
generally used to comply with s89 (e.g. “claw-back” with a placing)pre-emptive rights could be disapplied
• Maximum discount: 10% LR 9.5 and 7.5% ABI
19
Open offers cont.
• Prospectus: required as offer to the public and admission to trading
• Cheaper for companies but less flexible for shareholders than rights issue, especially retail shareholders
no trading in nil paid rightsshares not sold on the shareholders’ behalfshorter timetable
20
RIGHTS ISSUES
(NO EGM)
Prospectus preparation (>3 weeks)
UKLA review (3/4 weeks)
Launch (D day)
Trading in rights (D+1 to D+15)
Rump placing (D+16/17)
Proceeds to company (T+3)
Prospectus preparation (>3 weeks)
UKLA review (3/4 weeks)
Launch (D day)
Offer period and notice period
EGM (D+16)
Announce results
Proceeds to company (T+3)
Rights issue vs. open offer timetable
RIGHTS ISSUES (EGM)
Prospectus preparation (>3 weeks)
UKLA review (3/4 weeks)
Launch (D day)
EGM (D+16)
Trading in rights (D+17 to D+31)
Rump placing (D+32/33)
Proceeds to company (T+3)
OPEN OFFER(EGM)
21
Placings
• Non pre-emptive offer to an investor to subscribe new shares for cash
• Documentation will depend on structure of placing
• May take different forms
vendor placingaccelerated bookbuilt placing
• Existing shareholders are diluted and receive no payment
• Can be done very quickly if no shareholder approval is required
22
Placings cont.
• An issue for cash on a non pre-emptive basis, although existing major shareholders often included
• Timetable: typically announce and book build on one day
• Pre-emption rights: must be disapplied or avoided
use existing disapplication (typically 5%)make subject to open offer “claw-back” over whole or partbuild book and provisionally place shares, but with placing subject to shareholder approvaluse vendor placing (on acquisition) or “cash box” structure so that the consideration for the issue is shares not cash
23
Placings cont.
• Maximum discount: maximum 10% under LR 9.5, existing disapplication typically 5%
• Prospectus: generally structured so that not required
less than 10% of share capitalnot offered to the public, typically institutional investors only
24
Cash box structure
Ordinary shares
Cash
Redemption of preference shares
Cash
PLC JerseySPV
Bank
PlaceesNew ordinary
shares
Ordinary
share
s
and re
deemab
le
prefere
nce sh
ares
Ordinary shares
and redeemable
preference shares
Cash
Illustrative cash box structure Additional considerations?
• Structure avoids pre-emption rights as issue of new shares for non-cash consideration, but there are some legal and investor relations concerns
• ABI letter to LIBA and FTSE 100 in February 2009
• Generally used for issues of 5% to 9.9% of share capital: above 5% pre-emption disapplication, but below 10% to ensure no prospectus is required
• Excess over par value of new ordinary shares available as distributable reserves rather than share premium
25
Key disclosure and risk issues
• Pre-marketing
greater prevalencetiming of approachnumbers of investors approached and information providedinteraction with DTR 2
• Underwriting
protection if underwriting off an announcement and draft prospectusconditions and termination rightsrestrictions on short sellingdealing with withdrawal rightsstructure of fees: commitment feessyndicate structure: late addition of co-leads
26
Key disclosure and risk issues cont.
• Sub-underwriting
nature of commitment sought: set-off permitted?approach of the issuerpassing on short selling restrictionstrends in fee levels
• Structure of disclosure documents
split circular and prospectus?no automatic mailing of prospectus to investorsreview of circular by UKLA if “unusual features”
• Prospectus disclosure
use of incorporation by referencefocus on risk factorsproperty valuation reportsworking capital
27
Alternative capital raisings
• As issuers seek to raise more cash, seeing more interesting structures
• Work within applicable limits of accepted market practice or risk of “amber” or “red” topping by ABI
• Government support for banks has seen use of preference shares (to date specific to bank recapitalisations)
• Beginning to see debt for equity swaps and banks agreeing to take warrants in restructurings
28
Preference shares
• Issue of a new class of share carrying rights to a fixed dividend and fixed entitlement on winding up, both paid in preference to ordinary shares but after debt
• Usually redeemable
• Timetable: terms typically agreed with investors before announcement
• Pre-emption rights: generally not applicable as preference shares will have fixed rights to dividends and capital, but shareholder approval will still be needed for other reasons
• Prospectus: generally unlisted and no offer to public so not required
• Investors will often expect an equity upside too, often through a separate instrument e.g. warrants rather than rights in the shares
29
Preference shares cont.
• Rarely seen in recent years, except for recent issues of preference shares to the Government by UK banks
• Key terms of Government preference shares in UK banks
12% dividend for five years, then LIBOR + 7%redeemablerestrictions on other dividendsrestrictions on executive payright to appoint board nominees
30
Warrants
• Issued as equity upside to encourage take up of debt e.g. bond issue, mezzanine finance or as part of restructuring or debt-for-equity swap
• Timetable: as part of related debt finance or restructuring as equity kicker
• Discount: exercise price typically used to be 5% to 25% premium to current share price, but nil premium may be more realistic in current market
• Prospectus: will be required if listing on the Main Market, but not if listing on PSM with no offer to the public (although requirements of LR 4.2 will apply) and not required on exercise of warrants
• Remember impact of pre-emption rights
31
Debt for equity swaps
• Balance sheet reorganised and creditors receive equity interests in consideration for restructuring of debt
• Alternative to insolvency process which is potentially value destructive for all stakeholders
• Existing shareholders tend to be significantly diluted where entity is close to insolvency (equity worthless) = cooperation of shareholders is required
• Depending on the state of distress, restructuring may also include cash injection through subscription for ordinary shares or preference shares
• Additional considerations for listed issuers
25% of shares in public hands (LR 6.1.19)related party transactions, whitewash/concert party analysisDTR disclosuresaccounting treatment of lender’s interestpensions financial support directions
32
Recent innovative structures
33
Recent innovative structures cont.
34
Concluding observations
• Market practice has changed over the last 12 months and will continue to evolve
• Proposals of RIRG have been received positively: short term fixes by FSA, ABI etc have been welcomed, but await more fundamental change (e.g. review of PD prospectus regime, compensatory open offer rules, accelerated rights issues)
• More sectors likely to follow on from the banks, Lloyds companies, property companies etc
• Unlikely bank lending will return to levels where capital raising is not required by a substantial number of listed companies
• Increased use of alternative approaches to equity capital raising: challenging times for pre-emption rights when the only alternative for a company may be insolvency
35
Questions?
Please note that these materials are based on publicly available information, are for general information only and are not intended to provide any form of legal or financial advice.
If you have any further questions, please do not hesitate to contact:
Charles Howarth+44 20 7466 [email protected]
Will Pearce+44 20 7466 [email protected]
For further information about Herbert Smith, please visit www.herbertsmith.com