Rights issues, all the rage in many key markets, have never been popular in Japan.
In fact, just like in the US, they are non-existent. That is partly due to a broad preference among Japanese companies for tapping the broader market with new share sales or using private placements – not least because of a Tokyo Stock Exchange rule that only allows them to conduct rights issues through doubling outstanding shares, not a smaller dilution, such as just a fifth of outstanding shares.
The TSE is trying to change that with plans for a push to encourage companies to undertake rights issues. But it has a daunting challenge ahead.
In the past week alone, Daiwa Securities has unveiled plans for a Y240bn ($2.5bn) new share issue and, as the FT reports on Wednesday, Mizuho, Japan’s second-largest bank, said it will launch a new share issue of Y600bn to Y700bn ($6.2bn-$7.3bn), All Nippon Airways, the Japanese carrier, is planning a new equity issue of $1.5bn-$2bn and Orix, the integrated financial group, is also believed to be preparing to raise funds soon through an equity offering.
These latest issues – mostly to be sold on the market at tiny discounts – come on the heels of a $13bn slew of similar equity raisings announced by big companies including Nomura Holdings, Toshiba and Sumitomo Mitsui Financial Group in the space of just a few months.
As Lex noted recently, all these raising “might have been classic rights issue fodder in Europe”. Instead shares are mostly being offered generally to the market, at minuscule discounts, with the rally softening the pain for diluted existing shareholders.
This, says Lex, partly explains why rights issues have never taken off in Japan:To date, the system has worked without them. US companies don’t do rights issues either, and much Japanese regulation echoes US rules. Furthermore, rights issues are often accompanied by plans for radical corporate action, including management change, which goes against Japan’s consensual grain.
The investor response to Daiwa and Mizuho’s plans on Monday said it all: Daiwa shares suffered a 12 per cent drop to Y587 while Mizuho saw its shares fall 3.4 per cent to Y229 (recovering somewhat on Wednesday). And on Tuesday, ANA and Orix shares slid.
Little wonder. Investors were “right to blanch” at the prospect of hefty dilution in their shareholdings, Lex said in a separate note. As Azuma Ohno, analyst at Credit Suisse in Tokyo, told the FT, Daiwa’s fundraising will result in a 30 per cent dilution.
Up to now, the strong market rally – the Topix is up by almost a third since its March low – has helped investors wear the pain of of dilution. But with signs that Japan’s equity rally may be tailing off – and with still so much capital to raise – the next wave of companies to raise funds in this manner might do well to heed the TSE’s campaign for rights issues.
Daiwa has also given us a stark reminder of why foreigners are often reluctant to invest in Japan’s markets. All the documents relating to its $2.5bn equity-raising plan are in Japanese. While there is some information available on its Japanese language website, there is no mention of the issue on the homepage of its English language website, nor in the “news and media” section.
Come on, guys. Foreigners (nearly all institutional investors) have in the past accounted for roughly a third of shareholdings in companies in the Nikkei 225 Average. Even now, after the concerted sell-offs over the past year, they still account for about 24 per cent, according to TSE data.
But given the dilutive effect of upcoming massive equity raisings in firms such as Daiwa, perhaps foreigners will be busily identifying more lucrative options for their money.
Related links:
Investor fears hit Daiwa and Mizuho – FT
Mizuho Financial to sell Y655bn in shares – Bloomberg
Carlyle raises $1bn for Asia growth fund – FT