Nearly 97 percent of HSBC rights issue taken up - BusinessWeek

Just in time to serve as a perfect example of what we do in class is relevant, HSBC announced it had completed a rights issue.

(A rights issue is a way of selling new equity by giving existing shareholders the right to buy new shares at a reduced price. These rights are generally transferable which means they can be sold to someone else who will buy the new shares.)

From BusinessWeek:

"Stockholders have purchased nearly 97 percent of new shares offered under a rights issue, HSBC PLC said Sunday, raising nearly $18 billion (12 billion pounds) for the London-based bank."

And from the BBC:

"The $17.7bn (£12.5bn) by HSBC raised makes this the largest rights issue in UK corporate history.

The take-up was not a big surprise because the shares were being offered at 245p each, but were trading on the London Stock Exchange at 435p each"

And from the NY Times:

"HSBC said it expected to place the remaining 3.4 percent of the offering on Monday but any unsold shares would be acquired by its underwriters...."

We just covered rights issues in class, so this will be of special interest to my MBA students!

SSRN-Stock Market Liquidity and the Rights Offer Paradox by Edith Ginglinger, Laure Koenig, Fabrice Riva

Class preparation yields another cool find!

The Right's paradox has been discussed for the three decades (See Smith 1977). In a single sentence, the paradox is why so few firms use rights issues when they appear cheaper (at least at first glance). Over the past 32 years, researchers have documented some costs of rights issues that are not apparent at first glance.

This research is further supported in a new working paper by Ginglinger, Koenig, and Riva. From their abstract:

SSRN-Stock Market Liquidity and the Rights Offer Paradox by Edith Ginglinger, Laure Koenig, Fabrice Riva:

"...using a database of French SEOs. We first document higher direct flotation costs, but also improved stock market liquidity after public offerings and standby rights relative to uninsured rights. We find that blockholder renouncements to subscribe to new shares and stock market liquidity are important determinants of flotation method choice. After controlling for endogeneity in the choice of flotation method, we find that public offerings are cost effective and more liquidity improving than standby rights whereas an uninsured rights offering is the best choice for low liquidity, closely held firms. Our results provide new insights as to why firms choose public offerings despite apparently higher costs."

Cite: Ginglinger, Edith, Koenig, Laure and Riva, Fabrice,Stock Market Liquidity and the Rights Offer Paradox(March 13, 2009). Available at SSRN: http://ssrn.com/abstract=1359094

This will definitely be included in upcoming class notes!

Active Intermediation of Non-Underwritten Rights Offerings by Mark Peterson

Rights Issues are a way of issuing new equity. They involve the firm giving rights to existing shareholders. These rights entitle the holder to purchase new shares at the subscription price (which is lower than the current market price).

Much research has look at rights issues. This has largely looked at who uses them, how they work, and why we don't see more of them (this latter point is often called the rights offering paradox of Smith 1977).

Mark Peterson offers new insights into this by examining shareholder behavior around rights issues by closed end funds.

SSRN-Active Intermediation of Non-Underwritten Rights Offerings by Mark Peterson:

His findings? That shareholders behave much like the the financial intermediaries (i.e. underwrites) studied by Singh (1997). That is, the shareholders appear to subscribe to more shares when there is an overallotment option (which is rational since the over allotment option allows those who fully subscribe to buy more shares), and actively hedge their positions by shorting shares.

In his words:

"The evidence presented is consistent with shareholders and brokers actively intermediating these offerings in a way similar to that of underwriters in underwritten rights offerings (Singh 1997). That is, intermediaries hedge the shares they purchase in the offering by simultaneously short selling the underlying stock."

Moreover, Peterson suggests that the costs associated with these strategies may explain the rights paradox. Notably:

"Large negative returns during the offering period, evidence of wealth transfers from non-participating shareholders to intermediaries, and difficulties associated with shareholder intermediation make the non-underwritten rights method highly impractical for widely held firms and may partially explain the rights offering paradox."

The paper also has some other "cool things about rights offers" that you may not have known. For instance,

* "Herzfeld (1996), in a survey of closed-end funds that issued rights, reports primary subscription rates of 50-60% for non-transferable offerings and 70-95% for transferable
offerings."

*"The offering of additional shares at a discount through the oversubscription privilege and over-allotment option provides incentives for current shareholders to attempt to purchase more than their pro rata allotment of shares and, therefore, receive a wealth transfer from non-participating shareholders."

*"54% of the non-transferable offerings and 69% of the transferable offerings include fees paid to brokers to aid in the solicitation of rights. In these offerings, the fee, typically 2.5% of the subscription price, is paid to brokers when they or their clients subscribe to the offering."

* and from footnote #7: "Subject to narrow exceptions, closed-end funds are prohibited...from issuing stock to the public at a price that is less than the net asset value. Because closed-end funds typically trade at a discount, a rights offering is frequently the only viable offering method. The SEC (1977)
discouraged the use of an underwriter in rights offerings, suggesting that such offerings were effectively offerings directed to the public."

I^3! (Interesting, Informative, and Important!) It will definitely force me to change my class notes!

Cite:
Peterson, Mark A., "Active Intermediation of Non-Underwritten Rights Offerings" (March 15, 2006). Available at SSRN: http://ssrn.com/abstract=891189