Andy Berry, a senior consultant at Fishburn Hedges, says rights issues are becoming more popular than at any time since the early 1990s and the credit crunch is set to accelerate this trend.
A rights issue is an issue of new shares for cash to existing shareholders in proportion to their existing holdings.
The drop-off in the use of rights issues had been extreme. At the height of their popularity in the 80s and 90s a busy year would see more than 200 rights issues and huge amounts raised - over £11bn in 1993 alone. How-ever, last year saw only five UK rights issues, raising £639m.
This week Société Générale, rocked by over £3.7bn of losses, set out plans for a rights issue at a discount of almost 40 per cent.
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Rights issues, the method by which companies raise money from existing shareholders, are now making a comeback after many years in which debt has been so much cheaper and far more readily available than equity.
Few people now remember, and fewer people understand, how rights issues work. That creates a significant comms challenge. Shareholders - and the media that they take notice of - need to understand what a rights issue is, how the maths works and, most importantly, how it protects their interests.
Rights issues were created to protect UK shareholders by ensuring that their interest in their company is not diluted when that company raises new money. Shareholders not wishing (or unable) to take up their entitlements to the new shares they are offered will receive cash instead, thereby capturing the value of the dilution that they ‘suffer'.
It is all straightforward in principle but potentially far less so when set out in the inevitably heavyweight prospectus issued to shareholders. The temptation for non-professionals to ignore it must be immense. In 2008, there have been two issues to date, raising a total of £462m.
With the credit crunch now restricting access to debt and many companies facing up to damaged balance sheets, there will be more to come.
Good investor comms are always important. Getting it right when markets are difficult and the subject matter is perceived to be new is even more so. Make it clear, make it simple and make it accessible - failure to do so is likely to alienate shareholders at a time when their support might well be vital to the survival of the company.'