Firms’ dash for cash to beat coronavirus

. . . but private investors are often given cold shoulder

FOR Britain’s stock-market quoted firms, this is the summer of the emergency dash-for-cash, brought on by the pandemic.

British Airways owner IAG, which will be seeking €2.75bn next month, is the latest to join the list.

Since March, as many as 90 others, including WH Smith and Whitbread, have raised about £14bn of new capital through right issues and placings, at an average discount of 10pc, according to data from Peel Hunt, the stockbroker.

Engine-maker rolls-royce may also be selling new shares to repair its battered balance sheet.

But private investors have been shut out from many of these issues, some of which may have been an opportunity to buy shares at a low price and store up profits for the future, as the companies involved were in the doldrums.

rights issues are shares offered, normally at a discount to the prevailing market price, by a company to its investors, in proportion to their existing holding.

COMPANIES may need the capital to get through a crisis, or want it, to make an acquisition, for example. The convention is that the offer is open to all shareholders, large and small, so the trend to bar small investors during the pandemic has sparked anger.

richard Wilson, chief executive of Interactive Investor, is one of the most vocal critics of this private investor exclusion, seeing it as inspired by ‘prejudice’.

‘ownership rights are being switched off,’ he says. ‘It’s wrong, and the fact that it is legal is just a nonsense.’ As he points out, one issue is that if private investors are excluded from a rights issue, their stake is diluted. As a result of a sale of new shares, they own less of the company than before.

That must be galling to investors in Asos, who were excluded when it raised £247m in April by placing shares with large shareholders and the board. At the time of the placing, shares in the online fashion retailer were 1559p. They are now 3358p.

Companies have been able to cold-shoulder their private shareholders because of a move to suspend the normal rules, which give all existing shareholders, from big City institutions to the smallest private saver, first refusal in an issue of new shares of above 10pc of a company’s share capital. Until the end of September, they can raise up to 20pc of their value from pension funds and other institutions, without including private investors. The rationale is that offering rights issue shares to private investors is too time-consuming, so firms may not be able to raise the capital they need quickly enough – a dubious argument at a time when technology makes the admin much faster.

But not all companies regard smaller shareholders as secondclass citizens. Compass, the catering giant, Taylor Wimpey, the housebuilder and online grocer ocado have embraced technology to allow all shareholders to join in.

PrimaryBid, a tech business set up to democratise the process, makes it simple for private investors to apply for the new shares using its app or website.

THE company, a partner of the London Stock Exchange, seems likely to assist in more rights issues and placings.

But before rushing to buy in a rights issue, investors should ask themselves whether they will indeed be buying shares at a bargain price – or throwing good money after bad.

In the case of IAG, whose shares have fallen from 636p to 164.75p since January, many experts believe the airline industry is facing an existential crisis. BA’s owner will presumably aspire to take advantage of the likely failure of rivals, when its finances are bolstered by the rights issue funds.

rolls-royce, another casualty of civil aviation’s woes, is said to need as much as £6bn. This week its debt was humiliatingly downgraded to junk status.

And shares are not necessarily a bargain just because they are cheap either, particularly in the current climate of economic uncertainty.

David Coombs, head of multiasset investment at rathbones, urges extreme scepticism. ‘You should ask yourself how any company is going to use the money. If it wants the cash to purchase another business, remember takeovers tend to have a poor record. Institutional shareholders may be happy to support a rights issue purely to see a company survive, but that shouldn’t be enough of a reason for a private investor.’

He goes further, suggesting that reluctance to back a rights issue may be a sell signal.

Private investors may well not be tempted by the chance to acquire more shares in either IAG or rolls-royce. But they would probably still like to have more access to future share sales for the chance to turn a profit – and maybe to make a difference. Many among Britain’s small shareholder community would like to play a role in the revival of the economy.

Anyone who feels strongly about the matter can sign the letter addressed to listed company boards at allinvestorsmatter.co. uk. Why should you put up with inequality?