Share Watch

AFTER years of tapping credit markets for financing future business, the credit crunch has temporarily turned off that capital flow for companies.

As a result companies are increasingly turning to their existing shareholders to raise much-needed capital. This explains the rash of Rights Issues from major companies including Royal Bank of Scotland, HBOS and Cattles, with further issues expected over the summer months.

Rights Issues are a simple mechanism. The company issues new shares at a discounted price on which existing shareholders have first refusal.

However, it should be noted there is no obligation on shareholders to purchase the rights; they can either take up the new shares at the discounted price, they can let their entitlement lapse or they can sell the nil paid' rights in the market.

Lapsing or selling the rights will dilute a shareholder's interest in a given company (by virtue of the additional shares that have been issued), resulting in the shareholder receiving a smaller percentage of the company's future profits, or indeed losses. In a perfect world, higher company profits will equate to a higher share price and/or more generous dividend payments to shareholders.

Take the Royal Bank of Scotland rights issue as an example. The company is in the process of raising £12 billion by offering shareholders 11 new shares for every 18 shares currently held. To encourage shareholders to take up the new shares they are being issued at £2 per share which represents a large discount to the existing shares that were trading at £3.72 just before the rights issue was announced. Thus a shareholder with 2,000 shares has the option of buying a further 1,222 shares at £2 per share compared to the current market price of £2.53 as at the time of writing this article.

At this point it is a good time to explain why the price of RBS shares has fallen from £3.72 just before the rights issue to £2.53 earlier this week. Firstly, the shares are now quoted ex rights' so the dilution effect mentioned earlier has now taken place. This accounts for just over a half of the fall in the RBS share price with the remainder being a genuine fall in the share price. The banks are still out of favour as the credit crisis continues and one of the large US brokerage houses issued a negative report on several of the UK banks earlier this week.

On the local front, Dorset County Council has granted planning permission for Portland Gas to proceed with the underground gas storage caverns on Portland. Construction is expected to commence this summer and, when completed in 2015, the facility will store one billion cubic metres of natural gas, approximately one per cent of UK annual demand.
David Evans