After a near-£30bn flood of rights issues in the first four months of the year, a second long-awaited wave is now upon us – but this time, investors are being far pickier.

Amid expectations for a similar volume of cash calls by the year end, there are growing signs that the process of raising fresh capital will prove rocky for some companies.

This month a series of companies and their advisers have begun to warm up their biggest shareholders to the idea of issuing new shares as they seek to shore up balance sheets.

Greene King, the pub company, kicked off the second wave of rights issues last week, asking for £208m. Liberty International, the property company, followed this week, with plans to raise £620m.

Now shareholders are expecting a tide of new issues, many of them from small and medium-sized companies, some in distress, for as much as £25bn more by the end of the year.

This week it emerged that the board of 3i, the private equity investment company, has been looking hard at a rights issue, and that Yell, the Yellow Pages publisher, and DSG, owner of Curry’s and PC World, are talking to their investors about raising new money.

But while shareholders backed almost all the companies asking for money in the first bout, they are proving more selective about the
second.

“We are seeing companies that either don’t need the money or are such poor quality we question whether we want to back them,” says the head of UK equities at one group.

“We don’t have bottomless pockets of cash,” says another.

An early sign that investors might turn down proposals came when Pearson, the owner of the Financial Times, asked for £270m to take advantage of opportunities as they arose. Investors were unwilling to write what they saw as a blank cheque.

Now 3i is facing opposition to possible plans for a rights issue, on the grounds it does not need the money, say big investors.

Meanwhile, investors are hesitating to support calls for cash from companies such as Taylor Wimpey, the housebuilder, which needs to cut its debt burden.

There are also questions over DSG’s proposed capital raising. Like Wolseley, the builders’ merchant whose non-UK investors were unable to take part in a rights issue, DSG has come up with a complex two-part process designed to raise money from existing investors and place new shares with new investors to broaden its shareholder base.

That is proving contentious. One investor said on Wednesday: “DSG claims its shareholder register makes it a special case. But we are worried these structures will become a norm”.

Another said: “These issues involve material changes in holdings and influence and therefore risk a backlash from existing investors.”

“Companies need to understand that they don’t have a god-given right to tap their shareholders for money,” says one investor. “In the normal course of events companies with poor management, weak strategy, and no competitive edge go bust and we shouldn’t sell quality investments to fund them.”

Besides a logical reluctance to back unconvincing cash calls, investors are facing practical obstacles, too. Inflows of new money into most asset manager’s funds have slowed or reversed, and dividend income is declining. That means most managers are having to sell shares to fund any new investment.

Nonetheless, investors argue that the UK rights issues system, protecting investors’ holdings from dilution, has worked well so far – the FTSE All-Share index has fallen just 3.6 per cent since the start of the year. “The market has held up remarkably well,” says the head of investment at one of the UK’s top investment groups.

“If you look at the scale of the refinancing, the fact that all these rights issues have been absorbed is a testament to how well the UK system is working.”

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