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Equity markets: When rights go wrong

Recent deals from Lonmin and Saipem demonstrate that in current markets even one of the more straightforward types of capital raising, rights issues, can struggle. Is the model broken, or is this troubling evidence of just how risk-averse underwriters have become?


Deep water: Italian oil and gas firm Saipem

The business of helping public companies raise new equity capital is hardly the stuff of radical innovation. And the most traditional and conservative method of all, the rights issue, should not be controversial.

So when the banks underwriting a $407 million rights issue by South African platinum miner Lonmin in December 2015 were left with a stick of unsold shares even after completing a rump placement, many in the market were left scratching their heads. None of the equity capital market professionals that Euromoney has spoken to in the last few weeks – many of them veterans of their trade – could remember this happening before. Failed deals, yes; but not ones where banks had completed a rump placing that itself had not been fully sold.

Lonmin was bad enough. But when a similar event happened on a €3.5 billion rights issue by Italian oil and gas firm Saipem just months later, with the unwanted rights sold but then not exercised, the worries increased. Luckily for the 11-bank syndicate underwriting Saipem’s deal, the reason why they ran into trouble in the first place was also their escape route.

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