Judging by the comments from traders and others spewing out onto the wires in response to the pricing of SocGen’s rescue rights issue on Monday, it was as though financial markets were witnessing something truly ghastly.
But is a discount of just under 40 per cent really so shocking? It is to one “Paris based share dealer at a foreign bank,” who told Reuters:
It’s a very, very low price. We were not expecting such a discount. It reflects the lack of demand in the market.
The terms are on a one-for-four basis, at €47.50 per new share, to raise €5.5bn. The surprise seemed to be that this was a lower price than mooted over the weekend in the French press and comparisons were being made to BNP Paribas two years ago, when the rival French bank raised a similar amount of money at a discount of 15.5 per cent to help finance the purchase of Italy’s BNL.
It’s a lazy comparison, of course. Investors take more kindly to cash being raised for expansion; markets were not traumatised back then; and BNP had not just discovered that a rogue trader had been betting more than the capitalisation of the bank.
Go back to the days when this sort of plain vanilla rescue cash call was a more regular event – the early ’90s – and you will find that a discount of 30 to 40 per cent was not just common, it was the benchmark.
What’s different this time is that the terms of SocGen’s rights seem to avoid purposefully all the improvements made over the past 15 years in the way companies raise emergency money. For example, wider discounts often reflected the fact that a rights issue had not been underwritten – or would be guaranteed at a lower cost through an underwriting auction process. And then the whole need for underwriting and/or discounting was largely swept away with the use of bookbuild pricing for new equity issues – distressed or otherwise.
SocGen’s money is underwritten, but the credibility of the management is not – hence a natural desire to avoid testing the patience of those French institutional shareholders who will now be expected to rally round.
New shares at €47.50 is not too bad. SocGen’s old stock was trading five per cent lower at the opening on Monday. In price terms if not words, JP Morgan and Morgan Stanley, who will have to pick up the pieces if this proves to be a flop, will not be too unhappy with the market’s immediate response.