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Equities: Swedish banks show rights issues can still work

Today few banks in Europe could raise equity capital from private sources. Governments are now the leading providers and will continue to be so for some time. But Swedish banks are hoping to complete a little flurry of conventional rights issue recapitalizations this month, in a reminder of how equity capital markets used to work in the days before banks in Europe resorted to taxpayers to cover their losses.

The Swedish banks face an immediate but probably manageable problem in bad loans to borrowers in the hard-hit Baltic states and see looming the bigger and less quantifiable worry of just how badly the European and global recession will hit corporate and retail borrowers at home in Sweden.

As they seek the capital they need to survive mounting loan losses, Swedish banks have one key advantage over banks in the UK and the rest of Europe. They each tend to have one or two large reference shareholders that can anchor an equity capital raising by publicly affirming their intention to subscribe to their allotted rights – and even by underwriting beyond their pro-rata entitlement – so giving arranging investment banks greater confidence in underwriting the rump of the rights issue and enabling the issuing banks to announce their deals are essentially done from day one.

These deals highlight the value of maintaining pre-emption rights for existing shareholders and especially for stable owners taking a long-term view of their holdings.

When SEB announced on February 5 a SKr15 billion ($1.7 billion) rights issue, Investor, the holding company for the interests of the Wallenberg family, immediately confirmed its intention to take up rights, along with several other key investors together representing 43.7%

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