As you know the major banks are raising capital. Regulators want them to hold more capital as that makes them safer, and less likely to fail, during financial crises.
You would probably have noted that NAB has already launched a $5.5 billion capital raising; CBA was expected to be the next major bank to tap shareholders for money.
It was ANZ who jumped in with a $3 billion capital raising next with CBA announcing record profits and a $5b rights issue/capital raising today.
The raising was underwritten for $2.5 billion by three investment banks – Deutsche Bank, Citi and JPMorgan. Basically, if investors didn’t buy all the shares on offer, those three banks would be left holding what was left over.
Interestingly the floor that was agreed of $30.95 was below the lowest closing market price for ANZ over the previous six months of $31.09. Arguably that should have mitigated the risk of an underwriting shortfall.
Left holding the can
However that is not how it turned out and the investment banks still took a risk with the timing and the pricing. In a rushed book build, they chose not to lure shareholders with a discounted rights issue but rather chose a placement without much of a discount to the existing ANZ price.
Big institutional investors were offered the stock at $30.95 a share – that was a 5 per cent discount to the closing price last Wednesday. (Retail investors could buy ANZ shares in the raising as part of a share purchase plan.)
That 5 per cent discount was extremely slim. NAB’s discount on its raising was a much more attractive 15 per cent.
A clear lesson
The investment banks clearly didn’t get the full raising away and they have been left holding the can to some extent.
ANZ’s share price has now fallen below the capital raising price of $30.95.
The investment banks, arguably, after mispricing the capital raising have egg on their face.
As an aside, the ANZ Board now looks smart: they grabbed the money when they could and sold shares at what has turned out to be an attractive price. Further small shareholders will now be offered shares at a discount to the big boys through a SPP that is priced at VWAP??.
The lesson is clear: Investment in equities is a long term endeavour and a focus on the short term actually creates more pricing risk and not less. Indeed short term pricing actually gives no indication of value.
That should be clear to the investment banks who constructed a 12 hour window to raise capital that could have been raised over say a month with all shareholders being treated fairly and equally (as NAB did).
Indeed by rushing a capital raising at a thin discount – through an “accelerated book build”- they increased their underwriting risk. They simply ignored the observable risk that bank equities would be under constant pressure due to the expectation that capital raisings were coming across the four large banks.
In this market everyone is at risk of misreading prices and values.
The ANZ Board may have raised $2.5 billion at above today’s share price, but $30.95 is 20 percent below ANZ’s market price of mid-March 2015.
Remember back then they told shareholders that they did not need a capital raising.