Margareta Pagano: A capital crunch is coming if cash calls aren't speeded up

The Treasury must grasp the nettle if the City is to keep its reputation
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The Independent Online

If London wants to remain one of the world's great financial centres then the authorities must move fast to reform our arcane system of raising capital. You only have to look at the chaos surrounding the recent bank rights issues to see that the way we raise new money is no longer suitable for a modern market. It's the process rather than the principle of pre-emption rights – whereby all shareholders have the privilege to buy shares in proportion to those they already own – that has caused most of the confusion and delay.

As we report today, the Treasury is finally getting its act together and a working group meets this week to consider how to reform the process. Members of the taskforce are drawn from across all the City constituencies – from the biggest institutions to hedge funds. As legislation will be required, there are also representatives from the Financial Services Authority and the Bank of England.

One of the group's biggest challenges will be to find a fair and efficient way of shortening the rights timetable. Currently a company can only go through with its cash call once it has published a full prospectus. Then investors have to be given time to deliberate before voting on the capital-raising at an extraordinary general meeting. As recent rights issue have shown, this can take months.

Indeed, it will have taken HBOS 90 days to complete its cash call, while Royal Bank of Scotland took 48 days. As one US banker suggested to me, the institutions are happy to go through with raising money in IPOs through book-building or block-trades in days. Surely it can't be beyond the wit of our biggest investors to make a fast decision on how many shares they want?

Dropping the need for a full prospectus could be one approach to shorten the timetable, but the thrust of any reform must be to make the process contiguous rather than sequential. A speedier system might have avoided many of the problems at Bradford & Bingley.

Stopping some of the more dramatic short-selling that has occurred during the recent cash calls is a trickier issue, but it needs resolving too. Many investors, particularly the hedge funds, have taken part in the recent underwriting but have also been behind the short-selling. This seems perverse, as they are hurting themselves long-term. One way to avoid this would be a sort of voluntary code: anybody involved in the underwriting agrees not to trade until the issue is out of the way.

Retail investors have to be protected and given more time. This is not impossible to achieve. The Australians have adopted a twin-track system in which the institutions deal with their rights before the offer is opened to smaller investors, thus giving the company the money much quicker. Norway and Taiwan have a similar approach.

But there is a dangerous sense of déjà vu about this debate. It has been raging, on and off, for at least the past two decades. Inevitably, when times are tough, the issue shoots up the agenda, as it did after the 1987 crash. But, human nature being what it is, memories fade, times get better and the debate slips off the radar.

Every now and again, the big investment houses, particularly the Americans such as Goldman Sachs and Morgan Stanley, raise the issue – perhaps because they can see more clearly how well the alternative placing of shares works in their home markets. Quite rightly, the UK authorities have always resisted their calls for change because they have been suspicious of the sub-text – that the real ulterior motive is bigger fees. But this time around there is a much more robust mood in the air for change. Even the bigger banks seem to accept that pre-emption rights are part of the UK fabric and that the method cannot be changed without violating this right.

There will be many more companies requiring capital over the next few months. Hopefully, the Treasury will work fast to make sure the credit crunch doesn't turn into an even more serious capital crunch.

Sir Stuart has to woo those women of a certain age

The Marks & Spencer investor had a point when she took Sir Stuart Rose to task at last week's meeting about the style of clothes for ladies of a certain age. Too much cleavage, she said, and not enough dresses with sleeves.

She's right. Skimpy, décolleté dresses are great for the young, but what about the rest of us? Whenever M&S gets too fashionable, it gets into trouble. There was a time when working women could find just the right suits or dresses that would take them from the trading floor to the chairman's office. Not any more. Today's clothes for the more discerning are dowdy, an afterthought.

Lloyds is right not to expand abroad now, but it could look closer to home

Well done to Eric Daniels for resisting the urge. Very sensibly, the chief executive of Lloyds TSB has decided now is not the time to be exploring Germany.

Daniels had been looking at bidding for Deutsche Postbank, the German retail bank which is part of the giant Deutsche Post, and at Dresdner Bank, owned by the insurance group Allianz.

Lloyds' shareholders will be delighted to learn that Daniels and his corporate financiers have pulled their German ambitions, on the grounds that the numbers didn't add up. The country's huge retail market always looks intriguing to outsiders, but it's a notoriously difficult industry in which to improve margins.

So it's surprising that Lloyds' shares didn't bounce back that much on the news, after having fallen 15 per cent since the potential deals were disclosed. Compared with the rest of the banking sector, the shares look too low.

What the German experiment did show is that Daniels is itching to expand again after many years of trimming back. Lloyds is one of the best run of the clearing banks and has avoided much of the sector's wilder excesses.

What we don't know is whether Daniels only wants to expand overseas. Surely expanding in the UK would be a great move right now? Daniels has always liked the mortgage book model and has looked at Alliance & Leicester and Northern Rock in the past.

Even Bradford & Bingley could be interesting, or a mu-tual fund, one of which may come up for sale over the next few months. Lloyds is one of Britain's biggest mortgage lenders, under its Cheltenham and Gloucester brand, and building up the lending book could be a smart move.

It is also one of the biggest lenders to small business, but now the corporate loan market is going to get tough, with so many of the larger banks in trouble. Making a big push for the big-ticket clients could prove very rewarding in the long term.

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