Against the background of the investors’apathy and dormancy at the primary segment of the capital market, shareholders and core investors in several quoted companies have opted to provide additional equity funds to their companies, putting rights issue as nearly the main equity-based means of raising funds.
The primary segment of the capital market is the new issue market where companies can raise new equity funds through public offer or other combinations.
However, while the secondary market, where quoted shares are traded, has recovered significantly, the primary market has been dormant since the recession in 2008. There has been no initial public offering or public offer in the market since then.
The Nation’s check indicated that companies with substantial major investors’ holdings are falling back on the existing shareholders to bridge equity financing gaps and reduce dependence on short-term loans.
Not less than four companies have initiated plans to float rights issue in the past three weeks. Shareholders of Diamond Bank and Sterling Bank had earlier this month approved plans by the banks to raise new funds through rights issue. Shareholders of Berger Paints on Monday mandated their board to float a rights issue of one new share for every three shares held. Resort Savings and Loans also secured the approval of the Nigerian Stock Exchange (NSE) to float a rights issue.
Transnational Corporation of Nigeria (Transcorp) has opened application list for its rights issue, which is expected to raise about N13 billion. Transcorp is issuing about 12.91 billion ordinary shares of 50 kobo each at N1 per share. The right issue is expected to close on May 31, 2013.
Both Transcorp and Berger Paints have indicated they intend to use the net proceeds of their rights issue to finance expansion and modernisation of their businesses. Berger Paints would use the net proceeds of the rights issue, which will be underwritten up to 30 per cent, to further modernise its factory. Transcorp will use the funds to finance its new power business and expand its hotel and agro-allied businesses.
Both Sterling Bank and Diamond Bank are to raise equity funds to bolster their balance sheets and support tier Two capital as they seek to energise small and medium business financing.
Rights issue gives the first right of refusal to existing shareholders and thus preserve shareholding structure. As such, rights issue is usually initiated with the prior consent of the majority shareholders, who must have indicated prior interests to pick up their rights.
However, new investors can also buy into a rights-issuing company through rights trading on the secondary market.
Market analysts said the growing list of rights issues early this year underscores the preparedness of core investors to refinance their companies.
According to analysts, rights issue implies significant financial commitment by the core investors.
They said they expected more companies to file for rights issue given the high gearing ratios of several quoted companies, which interest burden could stifle returns to shareholders in the period ahead.
Managing Director, GTI Securities, Mr Tunde Oyekunle, said the recourse to rights issue was a sign of confidence of shareholders in the prospects of their company, especially the core investor, which would provide the larger chunk of the required capital.
He added that the generally weak state of the primary market has left core investors with little option then to pick up the gauntlet.
Economist and securities advisor, Sterling Capital Markets, Mr. Sewa Wusu, said the market scenario and timing did not favour public offer, particularly given the recent experiences and loss of value by most investors.
“We are seeing more of rights issues because the core shareholders are ready to inject more funds to their company and still maintain their current holdings. The rights issue avenue will also give the existing shareholders the right to purchases new shares at a discount to the market price,” Wusu said.
