The Guidance, due to be published mid October by the Bank of England, is intended to help UK listed companies make informed choices about share issuing methods. The Guidance is structured as a list of questions or arguments which issuers should consider putting to their advisers, brokers and/or lead nderwriters. The MMC's recommendations for the content of the guidance were that it should:
1. encourage the use of tendering for sub-underwriting;
2. encourage the use of tenders which involve the whole of the sub-underwriting and which are open to as wide a group of potential sub-underwriters as practicable;
3. explain when deep-discounted rights issues are likely to be advantageous and recommend that the scrip element of such issues should always be made explicit.
The Guidance, as specified by the MMC, has been developed with the help of, and is endorsed by, the Confederation of British Industry, the Association of British Insurers, the National Association of Pension Funds, the Fund Managers Association, CISCO, The Association of Corporate Treasurers and the Hundred Group of Finance Directors.
There will be a technical annex and two appendices to the Guidance covering the following:
Technical Annex: to help companies estimate the true cost of their chosen equity raising method.
Appendix 1: Background to the Guidance
Appendix 2: Methods of bringing further securities to listing
Members are recommended to read the full text of the Guidance which will be available directly from the Bank of England (www.bankofengland.co.uk/markets/gilts/shareissuing.pdf).
A paper prepared by the Association to supplement the Guidance, giving a list of information that issuers may request from their advisers is reproduced below.
1. The Association of Corporate Treasurers (ACT) recommends that its members might wish to seek certain information from their advisers if a tender is contemplated and, if a tender is used, after it has been completed. Such information, by particular reference to issues with comparable characteristics, might include details on:
1. the types and proportions of tender mechanisms used historically (eg single strike, 'what-you-bid-is-what-you-get');
2. the outcomes of past successful and unsuccessful tenders including issue discounts, cost savings achieved and any abnormal share price movements experienced;
3. any historical and expected relationship between the underwriting process selected and its outcome, bearing in mind relevant factors such as issue size (both absolute and relative to market capitalisation), issue discount, issue type, nature of shareholder base, liquidity and price volatility of the shares, use of proceeds and market conditions at the time of issue;
4. any historical and expected relationship between the market underwriting mechanism selected and the form and cost of any primary underwriting;
5. the capacity of the sub-underwriting market by type and number of institutions;
6. the proportions and basis of allocation of sub-underwritings to be offered on a standard fee, negotiated fixed fee and tendered basis;
7. the proportions and basis of allocation of sub-underwritings to be offered on a standard or negotiated fixed fee basis, but subject to a clawback through tender;
8. the intentions of the underwriters with regard to the disposal of the rump, and of the stick in the event a finely priced issue fails;
9. the intentions of the lead underwriters or brokers with regard to their own participation as principal in any tender process and the impact, if any, on the underwriting fee;
10. subject to any over-riding confidentiality requirements, the evidence for transparency in terms of the institutions to which underwriting or sub-underwriting was offered, and the actual allocation;
11. if a tender was used, details of the percentage tendered;
12. disposal details for the rump and stick, if any.
NB "rump" refers to those nil-paid rightsto shares not taken up by shareholders, which are sold in the market (as nil-paid rights or as the shares after rights exercise) and whose proceeds are remitted to shareholders not exercising their rights. "stick" is any shares bought by underwriters as a result of their underwriting obligations being called upon.
2. The ACT recommends that its members might wish to seek certain information from their advisers if they are considering a non-underwritten deep discounted issue. Such information might include details on:
1. the capacity of the market to absorb nil-paid rights by type and number of institutions, both in general and specifically for an issue of the size and type contemplated;
2. the probable market reaction to the lack of underwriting and size of discount, as exhibited by the expected short and medium term performance of the share price for the proposed issue, and how this would compare with similar issues by other companies;
3. details of contingency plans for the disposal of any rump of nil-paid rights not subscribed by holders, in the relatively unlikely event that a substantial rump should arise;
4. recommendations for the marketing of the nil-paid rights for the issue being contemplated, and any other steps which could be taken to maximise value to shareholders selling their nil-paid rights;
5. the proportion of nil-paid rights sold in the market and the prices achieved compared with their theoretical value;
6. the extent to which the nil-paid rights were actively marketed by brokers, and/or by market makers, and the impact of any such marketing on the bid-offer spread for the nil-paid rights;
7. the saving in underwriting fees and other costs achieved for the non-underwritten deep discount issue, after allowing for any cost of the marketing exercise in respect of the nil-paid rights, compared with alternative underwritten issue mechanisms considered;
8. an analysis of the market reaction to the non-underwritten deep discounted share issue and its outcome, bearing in mind relevant factors, such as issue size (both absolute and relative to market capitalisation), issue discount, issue type, nature of shareholder base, the liquidity and volatility of the shares, use of proceeds and market conditions at time of issue.