With the COVID-19 pandemic, the conflict between Russia and Ukraine, as well as the high inflation in Europe, investors believe that the shape of the global economy is deteriorating and that the world is facing an unprecedented financial crisis. As a result, many enterprises are eager to seek financial support in order to keep their businesses alive and avoid triggering a breach of bond or loan covenants in the debt market.
Listed companies, of course, are able to raise funds in a relatively flexible manner compared to private companies as they are provided with additional access to equity funding by means of issuing new shares such as share placements, rights issue and open offers. While these corporate actions may meet their financial needs, how many of these corporate actions are genuinely required?
The stock market is flooded with various financial gimmicks. Listed companies may propose a rights issue or open offer to invite existing shareholders to purchase additional shares. At first glance, the disclosed reasons for and benefits of carrying out the fundraising exercise may seem reasonable and valid, but in fact there may be other reasons behind the rights issue which shareholders are not aware of.
A rights issue is an offer by way of rights to existing shareholders that allows them to subscribe for securities in proportion to their existing holdings. Such rights can be sold in the market within a specified time period. If a listed company proposes to raise funds by way of a rights issue, it might be disclosed by that listed company to the public that the proceeds raised thereunder are to be used as general working capital (i.e. operating capital), however this could be a “phantom.” The real reason why the company is proposing a rights issue may be to accommodate controlling shareholders to acquire shareholding in the company at relatively lower subscription costs compared to traditional subscriptions.
This trick is a type of “financial gimmick.” Professionals such as accountants should equip themselves with adequate knowledge of the mechanics behind financial gimmicks and various window dressing techniques of listed companies to deliver valuable advice to their clients and help them make properly informed assessments before they make an investment decision.
About the e-Series
The Institute’s Corporate Finance Series include webinars that help to unveil the true rationale behind various equity fundraising activities such as rights issue, open offers, share placements and other issues to consider. These courses are also supplemented with practical applications to illustrate the true rationale behind corporate actions and the related risks and returns to investors.
The e-Series will help accountants, chief financial officers, financial controllers and banker lenders to understand the current risks of the unprecedented financial crisis ahead. I will conduct two webinar courses in October titled “Red Flag Alerts for Hong Kong Listed Companies during COVID-19,” and “Asian Bond Investments during Uncertain Times.”
The webinar “Red Flag Alerts for Hong Kong Listed Companies during COVID-19” is specially designed for financial professionals who are interested in knowing the real reasons behind corporate failures in Hong Kong and Mainland China. This course explains the early warning signals of listed companies and explains the structural screening framework used in analysing red flags. It also shares some current quantitative and qualitative red flags seen in relatively high-risk industries from bankers’ and fund managers’ perspectives.
The webinar “Asian Bond Investments during Uncertain Times” is designed for finance professionals or investors who are interested in the dynamics of investing in Asian bonds when global economies are affected by high inflation and COVID-19-related events. The course explains the different features of bonds in Asia and the related risks and rewards of the Asian bond market. I will also share some practical examples to illustrate the key early warning signals for bond investment.
Duncan Tang, Managing Director of UNI Consulting (HK) Ltd., and a speaker at the Institute’s Corporate Finance Series, has more than 25 years’ professional experience in corporate finance, credit and structured product analysis at various major United States and European corporate and investment banks.