Bank recapitalisations spur rights issue surge

Rights issues conducted by European companies this year have already exceeded the volume seen in the whole of 2016 — driven by a handful of large capital increases from banks seeking to repair their balance sheets.

For companies, a rights issue is a means to raise equity funding from existing shareholders by offering them the right to buy more shares at a discount to the market price. And, for banks involved in managing the process, by underwriting the deals, the fees earned can be lucrative.

In the first four months of 2017, European companies raised £28.7bn of fresh equity through such issues, according to data from broker Olivetree Financial. This is more than the £21bn raised last year and the £22.1bn in 2015.

Much of this year’s total to date has come from two large bank recapitalisations: an €8bn fundraising from Deutsche Bank and a €13bn issue from Italy’s UniCredit.

Martin Thorneycroft, head of equity capital markets for Emea at Morgan Stanley, said merger and acquisition activity had also spurred issuance.

“We’ve seen a number of rights issues to fund corporate M&A, as well as more conventional corporate balance sheet repair deals,” he said.

Several European companies have turned to the equity market to fund M&A this year, such as French asset manager Amundi, which launched a €1.4bn rights issue to finance its purchase of Pioneer.

This trend is set to continue, with Swiss pharmaceutical company Lonza in the process of raising SFr2.3bn of fresh equity to fund its acquisition of US peer Capsugel.

Based on the amount of new equity due to be raised by companies over the rest of this year, 2017 looks set to become the biggest year for rights issues for at least five years.

Capital increases at Europe’s banks are still likely to be the biggest of the upcoming deals, with Credit Suisse on the cusp of selling SFr4bn of equity. More deals in Italy are also expected — given the need for the country’s lenders to get to grips with the endemic issue of bad loans.

Italy’s government is pushing its banks to tackle their long festering non-performing loan exposures. But selling the loans at the deep discounts required by distressed debt investors creates mark-to-market losses, increasing the banks’ need to raise capital.

“Banks continue to provision and work through non-performing loan portfolios,” said Mr Thorneycroft. “UniCredit paved the way for how to make progress in that regard, and it is likely other banks may follow.”