Inside London

August 29, 2014 8:42 am

London Stock Exchange cash call supports underwriting cartel

Rights issue fees should be tackled by the exchange, not endorsed

You are Chris Gibson-Smith, chairman of the London Stock Exchange. Is your top priority to: a) ensure a fair fight between buyers and sellers of stock; or b) look after the interests of shareholders in the companies listed?

The LSE is in the middle of a well-flagged, and generally well-received rights issue to pay for a sensible acquisition – a fine opportunity to show how efficiently capital can be raised on the exchange at a reasonable cost to the shareholders.

Pricing such issues is a demonstration of the investment banker’s art. After all, much can happen between the fixing of the price and the moment the shareholders must choose whether to pay up. The LSE’s experts decided that offering three new shares for every 11 was the right proportion, at a price of £12.95 a share.

This ridiculously complex piece of maths raises £963m, to go towards the $2.7bn purchase price of Russell Investments. Unfortunately, not all the proceeds flow to the company. For all that erudite advice, and taking the risk that on September 25 all the shareholders turn the share offer down, the advisers (eight banks plus assorted hangers-on) are charging £25m.

There is a risk, of course, but the new shares are priced at a stonking 30.1 per cent discount to the market price immediately before the announcement on August 22 – this, you will recall, for a fundraising that had been well signalled beforehand and thus priced in by the market.

In order for the underwriters to be obliged to take the stock, markets everywhere would have to go into free fall in the next four weeks. If you wanted insurance against such an unlikely event, you could buy it cheaply with FTSE options. Even if shares did collapse far enough to discourage some LSE shareholders, it is absurdly unlikely that none would subscribe, so the underwriters would be released from at least some of their obligations.

This level of costs, for this level of risk, is commonplace. It is a blight on the LSE, and when the LSE itself fails to take a golden opportunity to do something to break this monstrous cartel, it provides the answer to the question above. Mr Gibson-Smith is retiring after a hugely successful 11 years, but this is not his finest hour.

Dangerous mortgages

Martin Wheatley is having a lovely time at the Financial Conduct Authority. The banks “constantly surprise” him with their capacity for poor behaviour (where has he been?) and almost every day Tracey McDermott, his scary-sounding director of enforcement and financial crime, finds someone else to fine.

This week Royal Bank of Scotland was dunned for £14,474,600 (after the 30 per cent discount for coming quietly) for not selling mortgages properly. Apparently, RBS had not pressed the borrowers on affordability, and some advisers even expressed views on the path of interest rates. Goodness, we cannot have that. Only bankers and financial journalists should be allowed to pontificate on such an important matter. Whatever next: advisers discussing house prices?

It is a comfort to learn that (so far) these shocking failings have not caused “widespread detriment” to customers. Still, one cannot be too careful, and naughty RBS failed to deal with the problems when the FCA’s predecessor regulator first raised them.

Well, the fine should teach them better behaviour, except that RBS is 81 per cent owned by the taxpayer. So one arm of the state is effectively paying £11,724,426 to another.

How the EU works

Alas poor Doresa and Milena, your sojourn in space may be brutally short. These two satellites, part of the EU’s madcap attempt to duplicate GPS (£4bn and counting, up rather than down) have been dumped in a low trajectory by their Russian-made rocket. From a satellite’s point of view, this is not good news.

The Galileo project, a sort of Common Agricultural Policy in space, is already six years late, and if it does complete in 2020, as is now planned, it will join a crowded field of navigation systems. The UK government sensibly opposed the whole idea, but its criticism became more muted after British firms won much of the work building the system. Wonderful thing, the EU.

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