Magazine article American Banker

Viewpoint: Need Capital? Consider Rights Offering

Magazine article American Banker

Viewpoint: Need Capital? Consider Rights Offering

Article excerpt

Financial institutions are faced with a particularly unfriendly environment when it comes to raising capital.

Wall Street institutions are no longer interested in the common stock transactions that have been so popular among banks the last three to four years.

Further, the well-oiled machine of trust-preferred offerings has been virtually barren since August. There have been many private-equity investors "window shopping" and talking about private placements involving various hybrid and convertible securities, but there seems to be a real lack of urgency in the investor community, because no one at this point is willing to call a bottom for financial stocks.

With both the public-equity and private-equity alternatives limited at best, what can bank holding companies do to shore up their capital and increase liquidity during these uncertain times?

One alternative, which has been largely ignored in the United States for the last 15 years, is for bank holding companies to pursue a rights offering.

An issuer gives all its current shareholders the right to subscribe for additional common shares, typically at a discount to the current market price. The period in which shareholders may subscribe for additional shares generally lasts 30-45 days.

Also, if all the shares in the offering are not subscribed, shareholders often are given the opportunity to subscribe for additional shares. Sometimes these underlying rights will be registered and traded on an exchange or over the counter during the initial subscription period. This provides value to shareholders who may not want to increase their investment in the company, because they can sell their rights to shareholders who do want to increase their position.

Ultimately, if there are shares left over, there is usually a standby investor that agrees in advance to purchase the remainder of the offering or up to a certain amount of the stock.

This standby investor could be an insider (provided the appropriate governance safeguards are in place) or an outside third party, such as an institutional or private-equity investor. Investment banks are useful in lining up such commitments and can help manage the rights offering.

What are some of the advantages to raising capital through a rights offering? First, unlike a private placement, a company can raise a great deal of capital through a rights offering without obtaining prior shareholder approval. Nasdaq Stock Market Inc. has provided guidance that as long as the rights and related shares are offered on a pro rata basis and on the same terms to all current shareholders, prior approval is not required.

On the other hand, the Nasdaq requires approval for private placements involving a sale of 20% or more of an issuer's common stock (including securities convertible into common stock) below either market value or book value, whichever is greater. …

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