The right thing to do?
Apr 1, 2009
RIGHTS issues are gaining popularity in the current economic climate. Should you take them up?
WITH THE CURRENT GLOBAL financial crisis and the likelihood of weaker economic numbers to
come, major companies are facing huge losses as their sales and profits dry up. Asset write-downs as
prices collapse have also hurt, if not wrecked, the balance sheet of these companies, resulting in a plunge
in their share prices as well. This vicious cycle may get worse, caution analysts.
And with banks reluctant to lend in the current weak economic environment, companies are rushing to get
their shareholders to pump in more money to shore up their damaged financial position. We have seen a
rush of such rights issues by companies recently, leaving investors wondering whether they should
subscribe to them despite the deeply discounted pricing of such issues.
For example, on March 2, 2009, HSBC launched United Kingdom's biggest rights issue, raising 12.9
billion pounds (or US$ 18.1 billion) to help it overcome big losses in the United States and exploit the
woes of weaker rivals. In this issue, HSBC sold 5.1 billion shares at 2.54 pounds each, which was at a
48% discount to its latest share closing price back then, on a basis of five rights for 12 existing shares.
However, the shares subsequently closed down 19% at a 10-year closing low of 3.99 pence.
Back home, two major Malaysian companies, Malayan Banking Bhd (Maybank) and TM International
Bhd (TMI), have proposed the issuance of rights.
In Maybank's case, it is proposing to undertake a renounceable rights issue on the basis of nine rights
shares for every 20 existing shares held as part of its requirement and strategic transformation plan to
recapitalise and enhance its capital base following its post-acquisition spree of the last two years.
Similar to other companies trying to entice their shareholders to subscribe to such rights in the current
weak equity market, Maybank has fixed its rights price at RM2.74/share, which was at a 34.4% discount
to the theoretical ex-price of RM4.17/share at the time the rights issue was announced. The issue is
planning to raise RM6.1 billion for the bank. However, the deeply discounted price means that there will
be up to 2.2 billion new Maybank shares being issued, resulting in a 32% dilution in its current equity
TMI, on the other hand, has also revealed a fast-track plan to raise up to RM5.2 billion from a rights issue
to shareholders to recapitalise its balance sheet. The issue has the full backing of its major shareholder
Khazanah Nasional, which has agreed to subscribe to an additional 20% of the rights shares not taken up
by other entitled shareholders. The issue price of the rights will only be determined later and is expected
be at a 30%-40% discount to the prevailing share price.
However, these announcements have not gone down well with investors.