An inquiry commissioned by the Institutional Investor Council, backed by the Association of British Insurers and the National Association of Pension Funds, lashes out at investment banks today for charging underwriting fees far in excess of the level of risk they face, and taking advantage of companies’ inexperience in capital markets.
The Rights Issue Fees Inquiry follows criticism of credit crunch rights issues launched by companies such as housebuilder Taylor Wimpey. The fees charged were a poor use of shareholder capital and should come under a similar level of scrutiny as outgoings such as executive pay, it said.
Inquiry chairman Douglas Ferrans said companies were “paying too much to ensure the deal is a success.”
“These costs have increased disproportionately to the risks,” he said. “What we have seen over the period is the risks of underwriting contract quite substantially and we would have expected costs to come down.”
Rights issue fees almost doubled from two per cent in 1999 to 3-4 per cent in 2009 as distressed companies were forced to raise fresh capital in risky market conditions.
Shortly after the credit crisis property firm Barratt paid £27m in fees to banks advising its £720m rights issue, while builders merchant Travis Perkins paid HSBC and Citigroup £12m to underwrite its £300m issue. Business Secretary Vince Cable welcomed the inquiry’s work.“Their report calls for more transparency and competition in the capital-raising process to ensure highly inflated fees become a thing of the past,” he said.
But investment banking sources told City A.M. last night underwriting was still highly competitive. “The danger with these reports is that it might be inferred that there is something sinister going on – but these services are being provided by a competitive industry,” one source said.
RBC Capital Markets and Barclays Capital structured a £2bn rights issue for life funds group Resolution in June in which they charged full fees for only the risk they underwrote and reduced fees for the risk that was sub-underwritten.
Joshua Critchley of RBC Capital Markets said: “It better aligned risk and reward for the underwriting banks. I believe that you'll see this structure used again."