Comments on: Immoral bankers http://blogs.reuters.com/felix-salmon/2010/12/14/immoral-bankers/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Developer http://blogs.reuters.com/felix-salmon/2010/12/14/immoral-bankers/comment-page-1/#comment-21991 Thu, 16 Dec 2010 18:50:56 +0000 http://blogs.reuters.com/felix-salmon/?p=6574#comment-21991 Thank you for the explanation.

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By: THELEGEND99 http://blogs.reuters.com/felix-salmon/2010/12/14/immoral-bankers/comment-page-1/#comment-21966 Thu, 16 Dec 2010 00:28:14 +0000 http://blogs.reuters.com/felix-salmon/?p=6574#comment-21966 To Developer: you can’t auction that easily because you have to issue a prospectus and there is a requirement to conduct detailed due diligence. Otherwise you can be subject to ruinous liability. That due diligence, along with the weeks of structuring work, takes many weeks and months. You can’t just auction out underwriting like it’s a piece of meat; this isn’t commoditised unless you want to eliminate the requirement for due diligence and prospectus liability (which I don’t think anyone would want to do).

That said, issuers can and do issue requests for proposals (RFPs) to banks and ask them to quote fees and indicative terms, just as you would for any other service.

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By: Developer http://blogs.reuters.com/felix-salmon/2010/12/14/immoral-bankers/comment-page-1/#comment-21953 Wed, 15 Dec 2010 19:41:51 +0000 http://blogs.reuters.com/felix-salmon/?p=6574#comment-21953 Why don’t all companies use auction like Google did with their IPO? It is simple and logical.

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By: THELEGEND99 http://blogs.reuters.com/felix-salmon/2010/12/14/immoral-bankers/comment-page-1/#comment-21948 Wed, 15 Dec 2010 17:20:45 +0000 http://blogs.reuters.com/felix-salmon/?p=6574#comment-21948 Felix, let me explain why the IIC report is so flawed and why a TERP discount is irrelevant to shareholders.

First, let’s remember that the IIC is a trade body of four other trade bodies of portfolio managers (institutional investors). Their principal complaint is that banks don’t pay them enough when they subunderwrite rights issues to institutional investors. This report is all about paying portfolio managers more and bankers less. This isn’t a moral question or even a regulatory question; it’s two big boys fighting it out over fees. The IIC is a very self-interested report by a trade body and for that reason, the investment banks generally didn’t cooperate.

I’ll quote from the International Financing Review, which is part of the Thomson Reuters family, I believe: “The starting point for the report is that institutions claim their share of the fee pot has shrunk as subbing fees have failed to keep pace with underwriters’ fees. Yet the report then states that shareholders have an incentive to keep subbing fees low.”

Second, the report completely overlooks the requirements of confidentiality. The report recommends n “club” to underwrite capital increases by issuers….but these offerings often require weeks/months of advance work, substantial due diligence and complete confidentiality. Institutions are not set up for this purpose and certainly not able to take on liability for the prospectus. (It’s pretty clear that no securities lawyer reviewed the IIC report before it was published.)

Third, what is exactly the basis for saying the rights issues fees are “too high”? Generally speaking the going rate is 2-3%. In the US investment banks charge 6-7% for share offerings and THEY ARE NOT UNDERWRITTEN – IT IS AGENCY BUSINESS. This is RISK business as the rights issues are underwritten often for 3-4 weeks, during which time share prices CAN fall below the underwritten price. This happened on the HBOS rights issue in 2008 for example and Morgan Stanley lost a lot of money. Should we really be browbeating banks to underprice their risk capital? Isn’t that how we got into trouble in the first place.

The IIC report is a disingenuous attempt by fund managers to exploit the anti-bank mood to demand more fees for themselves. These funds managers are under a lot of pressure because most are closet index-huggers and their performance isn’t great. So they effectively want to be paid subunderwriting fees for subscribing for new shares in companies they already own. (NB: a bank doesn’t have to subunderwrite. On the Continent the deals generally aren’t subunderwitten. But in the UK it is expected (by no means required) that the underwriting banks will subunderwrite ca. 50%

Finally, the DISCOUNT DOESN’T MATTER TO SHAREHOLDERS? Why? Because the discount is to the benefit of shareholders who can either (a) buy the new shares at the discount or (b) sell the right to buy at such discount (and the value of the right is of course directly related to the gap between the subscription price and the prevailing share price). The underwriters generally care because the deeper the discount, the less risky for them. But for shareholders it’s irrelevant, just as the precise metrics of a share split is irrelevant. For managements it’s relevant only for “macho” reasons.

Oh, let me add that the IIC assumes the company managements are weak lillies. My experience is that FTSE 100 and FTSE 250 companies are very savvy in negotiating down fees from banks. Again, we’re talking about adults.

I think, Felix, that you have it wrong here.

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By: TinyTim1 http://blogs.reuters.com/felix-salmon/2010/12/14/immoral-bankers/comment-page-1/#comment-21947 Wed, 15 Dec 2010 17:02:14 +0000 http://blogs.reuters.com/felix-salmon/?p=6574#comment-21947 Sorry Felix, I was being dumb.
For some reason I had convinced myself that the underwriters pay TERP for their stock.

If they pay the rights price then of course they are well in the money.

But if that is the case, surely every underwriter is PRAYING for the issue to fail. They would make an absolute killing, since a fully underwritten issue would never trade below TERP (ceteris paribus).

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By: FelixSalmon http://blogs.reuters.com/felix-salmon/2010/12/14/immoral-bankers/comment-page-1/#comment-21944 Wed, 15 Dec 2010 16:09:46 +0000 http://blogs.reuters.com/felix-salmon/?p=6574#comment-21944 TinyTim, I’m not sure I follow. If the underwriter ends up buying a bunch of shares that it doesn’t really want, but it buys them at a level well below the secondary-market level, that’s not a risk, right? It can just dump them onto the market.

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By: lambertstrether http://blogs.reuters.com/felix-salmon/2010/12/14/immoral-bankers/comment-page-1/#comment-21942 Wed, 15 Dec 2010 14:46:33 +0000 http://blogs.reuters.com/felix-salmon/?p=6574#comment-21942 Get me rewrite! “Immoral bankers” is redundant.

P.S. Why don’t we turn the banks into regulated public utilities?

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By: TinyTim1 http://blogs.reuters.com/felix-salmon/2010/12/14/immoral-bankers/comment-page-1/#comment-21939 Wed, 15 Dec 2010 10:38:54 +0000 http://blogs.reuters.com/felix-salmon/?p=6574#comment-21939 Discount to TERP is meaningless BS for idiots who don’t know what a rights issue really is and can’t do mathematics.

As for “the more the share would plunge overnight”… ha! Twaddle.

What matters in a rights issue is how much capital is raised relative to the current market cap.
That explains how much current shareholders need to pony up in order to maintain their current holding, i.e. not be diluted.

The risk an underwriter takes is that the shareholders won’t take up their rights.
If the rights are taken up then the underwriter ends up owning none of the company and has no capital at risk.
If the capital raising is unsuccessful the underwriter ends up with a bunch of shares in a company that it doesn’t really want which it then has to unload on a market that is already swallowing more volume than is customary.

If you are raising $100m for a $1,000m mkt cap company, the risk is FAR LOWER than if you are raising $500m for the same company.

The discount to TERP is irrelevant. That is pure marketing spin.
If you understand the maths of TERP you will understand that the “discount to TERP” is just another way of writing “rights discount” which again is irrelevant for the risk an underwriter takes.

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By: Danny_Black http://blogs.reuters.com/felix-salmon/2010/12/14/immoral-bankers/comment-page-1/#comment-21937 Wed, 15 Dec 2010 08:49:22 +0000 http://blogs.reuters.com/felix-salmon/?p=6574#comment-21937 empathy and sympathy.

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By: Danny_Black http://blogs.reuters.com/felix-salmon/2010/12/14/immoral-bankers/comment-page-1/#comment-21936 Wed, 15 Dec 2010 08:41:50 +0000 http://blogs.reuters.com/felix-salmon/?p=6574#comment-21936 Mike.Gayner, especially given around half the issuers were banks. It is the buyside i have zero empathy for.

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