Investors rightly fear over-optimism more than big rights issues
NEAR the end of last year, I spoke to a banker involved in UniCredit’s €7bn rights issue, which had generated huge scepticism in the markets.
How on earth was he going to convince investors to put so much money into Italy’s biggest lender with every sign that the Eurozone crisis remained unresolved?
His answer was that the size of the offering should, in itself, build confidence.
“Banks have done too many rounds of capital raising. Investors are very wary of being first-loss buffers [so] it’s got to be a one-off this time,” he said. The bank had arrived at the €7bn figure by factoring in impairments on sovereign debt and real estate. In other words, it could argue that the rights issue would be a “one and done” deal, not a stop gap.
Its success, against the odds, suggests that investors were convinced that UniCredit had done its homework (though whether they are right remains to be seen). The bank’s desire to confront the possibility that its situation could worsen and to build a large buffer against that was a selling point, not a minus. It gave investors some degree of certainty.
As Spain is now learning to its cost, the same cannot be said for its banks. Bankia’s €3.3bn share offering last year now looks like a classic case of the rose-tinted rights issue. Serious international investors, not convinced that the bank was being honest with itself about the scale of the problem, refused to put up cash for an over-optimistic management to squander.
Instead, it was left to retail investors, who failed to scrutinise the bank’s finances effectively, to plug the hole in its balance sheet. Until another hole opened this year.
In short, this is no time for bluffing. Individual countries or banks can choose to avoid confronting and tackling their weaknesses. Unfortunately for them, markets won’t.