Equities: UniCredit defies the odds with rights issue

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By:
Laurence Neville
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99.8% take-up of €7.5 billion deal; Positive sign for other eurozone lenders

UniCredit started 2012 on the ropes. Despite flagging its €7.5 billion rights issue to the market in mid-November and its stock price falling close to 24% as a result, the bank – one of the systemically important ones in Europe, with operations in 22 countries – suffered the indignity of a further 45% collapse in its share price (despite a 43.3% discount to the theoretical ex-rights price) in the four trading days after terms were released.

Just three weeks later – following numerous trading suspensions as its shares yo-yoed – UniCredit looked every inch the winner. Its shares were up 67% from their lows. Moreover, the bank had exploited improved sentiment with a swift one-two: it announced a €3 billion below-par buyback of tier 1 and tier 2 bonds to further bolster capital and covered bond issuance of up to €25 billion, to help broaden its access to funding.

More than lucky

To be sure, UniCredit benefited from a broad rally in bank stocks during January as fears of an imminent calamity in the eurozone receded. However, those involved in the deal claim that UniCredit’s achievement was attributable to more than just luck.

“We called it right – the press and the commentariat called it wrong,” says a senior banker involved in the deal, with more than a hint of Schadenfreude. “Banks often get accused of focusing on the short term but in this case we were the long-termers: people were describing it as a fiasco from day one. It reminds me of the infamous Chicago Tribune ‘Dewey Defeats Truman’ headline from 1948.”

The banker, choosing to remain anonymous given the “sensitivity of the [27-strong] syndicate and the client”, says that the bookrunners were braced for a turbulent market when rights started trading on January 9. “It was known that many shareholders were leveraged and could not participate fully or at all and that rights would have to be recycled,” he explains. “Given an illiquid market, the outcome was always going to be sharp falls.”

For joint global coordinators Bank of America Merrill Lynch and Mediobanca (UniCredit also coordinated) underwriting 10% of the deal each – and being on the hook for the remainder if committed shareholders backed out – was clearly a big risk. However, one market observer says reputational risk was the greater concern: “BAML could shoulder a €760 million hit but a misstep would have had major implications for its ECM business.”

The rights issue started just 10.68% covered through irrevocable commitments. “It meant, unlike other rights issues, that the discount could not do the work for us,” said the banker involved in the deal. “There had to be a proactive marketing effort to find new investors.”

Gary Greenwood, Shore Capital

Part of that effort was focused – through relationship bankers rather than the ECM salesforce – on sovereign wealth funds: Abu Dhabi’s Aabar Investments increased its UniCredit stake to 6.5%, making it the largest shareholder, while the Libyan Investment Authority, with 2.59%, is thought to have tail swallowed, selling enough rights to raise funds to allow it to take up part of its entitlement. Libya’s central bank, which owned 4.98% of UniCredit, sold its rights.


In December, European Banking Authority stress tests revealed that 31 banks had a combined €115 billion capital shortfall – UniCredit’s was €8 billion – and set a deadline of the end of June for resolution. Eden Riche, head of debt capital markets origination at Investec, says that “no fewer than 30 banks could need to raise equity to strengthen their balance sheets” and that they will have been watching UniCredit closely.

The success of UniCredit’s rights issue – with its 99.8% take-up – bodes well for the banking sector. “If large banks like UniCredit are able to successfully complete rights issues then it can only help to provide stability for the banking sector more generally,” says Gary Greenwood, bank analyst at Shore Capital. “Investors’ main concern is contagion risk and the failure of a rights issue would have sent shock waves through the industry.”

Certainly, UniCredit’s completion will have heartened banks considering a deal, notes the banker. “However, the run-up in bank stocks is more important: no one wants to sell equity at depressed values. Now they might.” Nevertheless, Greenwood says a rush of issuance is unlikely: “Most banks are trying to meet their capital targets by shrinking their balance sheets [or cutting dividends or selling assets] rather than through rights issues.”

That might be just as well. “The main challenge facing any bank seeking to raise funds is that many investors see the sector as un-investable,” notes Greenwood. “There’s insufficient transparency – either about banks’ balance sheets or how banks are connected – to provide reassurance to investors. Given the eurozone crisis and banks’ status as a political football, the sector is seen as a speculative rather than an investable opportunity. Until that changes, it will find it challenging to secure the capital it needs.”