Banks bully, brokers bleat
It’s just not fair. Those beastly banks are snatching the bread from our mouths, chorus three of London’s mid-cap broking houses. “Taxpayer supported banks” (do they by any chance mean Lloyds and Royal Bank of Scotland?) are strong-arming the clients of Panmure Gordon, Numis and Evolution into steering lucrative rights issue underwriting their way.
The trio are so upset at the sight of this lovely business disappearing that they have written to Paul Myners, the government’s Minister for the City, to complain about “anti-competitive behaviour.” It’s “stifling competition in the capital markets.” Anecdotal evidence from twitchy businesses in thrall to their banks suggest they are right.
It’s not just the “taxpayer supported” banks who can see the opportunity. Switching lenders in today’s conditions is tricky, and both sides know it. Underwriting equity issues, as practised nowadays, is a wonderful business to be in. The days when the new shares were offered at close to the pre-issue market price are gone. Typically, issues are priced at as much as 40 percent below the price the shares should command after the issue.
In other words, for the underwriters to lose money, the market value must be significantly less after the issue than it was before, despite the infusion of new money. The obvious answer is to dispense with underwriting altogether. If the story is convincing enough, the brokers should find enough support from investors.
The brokers counter that a company in distress needs a prior agreement from its lending banks that they will support it after the issue, rather than simply pull the plug and take the new money. The banks will not agree without the issue being underwritten, especially if they get a slice of the fees. In one recent case, says a seasoned broker, three banks each demanded 20 percent of the underwriting fees, although they were careful not to take any sub-underwriting, which is where the work to find the buyers has to be done.
This conflict is not new, but the way the banks are using their muscle is. The simple solution would be for Myners to read the letter (it’s short, Paul) and pick up the phone to the banks where the government is the dominant shareholder to tell them he doesn’t want to receive a follow-up complaint. Unfortunately, political life is seldom so simple. We have become used to bad behaviour from the banks, and they are unlikely to produce a pleasant surprise this time .