The Association welcomes and endorses the Guidance on Share Issuing Good Practice for Listed Companies issued today by the Bank of England. The Guidance was developed by the Bank in conjunction with the Association and other bodies and its publication meets a long held need for sound guidance on equity issuance. It follows the recommendations of the MMC that the use of tendering for sub-underwriting should be encouraged and that the benefits of deep-discounted share issues should be explained to issuers.
At paragraph 12 the Bank of England Guidance mentions that issuers may also wish to take into account recommendations made by The Association of Corporate Treasurers to its members. These recommendations outline the information that issuers might request from their advisers when contemplating a share issue in order to evaluate the benefits of using a tender or a deep discounted approach.
For many companies, the issue of equity is a rare event. It is not unusual for finance directors to participate in equity issues on only one or two occasions in their careers. It is the treasurer’s task to assess the risks and returns of alternative methods of issuing equity and to make a recommendation to his finance director and the company’s board.
The twin themes of the Bank of England recommendations lie at the heart of the principal dilemma of the treasurer: how to minimise the cost of the issue within an acceptable limit on the risk of its failure. The competitive tendering of underwriting in a carefully managed process opens up the opportunity for cost savings. These savings are increased as the discount to market price for the new shares to be issued is increased. At deeply discounted levels the need for underwriting the share issue may fall away completely. This can make the non-underwritten deep discounted issue attractive under certain circumstances, particularly since the tax concessions made by the Inland Revenue on the gains arising from the sale of nil-paid rights and clarification of the appropriate accounting for such issues in FRS 14.
In commenting on the Bank of England’s Guidance, the President of the Association, Philippa Foster Back said:
The lead taken by the Bank of England in recommending that companies consider new approaches to methods of issuing equity will result in lower issuance costs. It is to be hoped that several corporates may now consider proceeding with non-underwritten deep discounted issues in the light of the support for this approach given by the Bank. Philippa Foster Back, President of the ACT