Rights-issue activity has been low since the first half of
2011. Only $27 billion of equity capital has been issued across
EMEA in the last four quarters and just shy of $10
billion of that was from the
UniCredit rights issue completed in January.
For context, $29 billion was issued in Q2 2011 alone go
to Q2 2009 and it was $55 billion.
The status-quo cannot continue along these lines. Banks in
over-leveraged and under-capitalized. Under pressure to
raise their capital ratios but unwilling to go to the equity
capital markets (ECM) at stock prices well below book
value, bank managements have chosen instead to shed assets, buy
back capital instruments below par and sell businesses.
Its now dawning on regulators that insisting banks
improve their ratios has backfired and become a pro-cyclical
driver of further deleveraging inimical to their economies.
They want banks to raise capital. Will investors provide
One ECM banker tells Euromoney: You have to question
whether banks are an investable asset class right now, given
all the economic and regulatory uncertainties that make it
almost impossible to model returns. But investors are very
under-weight banks and presumably, at some stage, they will
snap back into being investable. The question is
I'm sure we'll see bank issuance from the periphery
before year-end, says Rupert Hume-Kendall, chairman of
markets at Bank of America Merrill Lynch (BAML), at a
presentation on Wednesday on the outlook for the ECM business
for the rest of 2012.
The market being challenging doesnt remove the need
for equity, and Europe is fundamentally under-capitalized, and
thats why we're here.
Its fighting talk from a firm that has played lead roles
in many of the biggest bank equity deals since the crisis.
Its questionable how successful a rights issue from
the eurozones periphery could be this year. The rights
issue from UniCredit sets a mixed precedent: while the deal
worked out in the end, the banks share price almost
halved after the announcement of terms in January.
It turned out that leveraged owners of UniCredit shares could
not finance take up of the rights, and started selling. Across
four days in January, the share price fell 40%, coming
uncomfortably close to the hard underwriting price.
However, BAML found buyers and the share price recovered. It
wasnt much fun, though, for the bank on the hook for the
deal. Does any underwriter want to go through that again?
Lets not forget market conditions last October
werent great either, says Hume-Kendall. If
UniCredit were coming to market now, we would absolutely
underwrite the transaction. Like every decision of this type,
it would be carefully considered but we would be there, you can
be 100% certain.
The deal didnt seem to inspire confidence in
UniCredits fellow peripheral banks there has
only been two other FIG rights issues from the periphery
since; from Portugals BES and Spains Banco
Craig Coben, BAMLs head of EMEA equity capital
markets, says: It has to be on a case-by-case basis, but
there could be appetite for a peripheral issue, and it might be
something that wed be interested in
The sales pitch isnt great: banks need capital to absorb
losses from exiting unwanted assets. And banks might not have
the luxury of waiting until the time is ripe for success. Coben
sums it up pithily: We have capitalism with too little