Investors' fury over fees for rights issues

Pension and insurance institutions claim banks are favouring hedge funds for sub-underwriting work
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The Independent Online

Investment banks are facing a backlash from some of the City's biggest institutional investors over their handling of the recent wave of rights issues. Senior executives from Legal & General, Scottish Widows and Standard Life Investments – furious at being frozen out of lucrative sub-underwriting fees – are believed to have made representations to the banks.

Investment banks typically agree to buy any unwanted shares in the event of existing shareholders not taking up their rights. They normally pass on some of this risk to institutions and others in a process called sub-underwriting. Usually the risk is minimal, unless the market price drops below the offer price. However, in the current environment, fees from this process are thought to be substantial.

One source said: "The institutions are not happy because they have backed billions of pounds worth of rights issues at this difficult time, in effect bailing the banks out of the mess they created. It seems like the institutions are doing all the work, while the banks pocket the fees."

One institution said it was furious at the way banks were offering hedge funds access to the sub-underwriting process to secure their more lucrative trading business in the future. "The banks make a lot more on hedge fund trading commission than they can ever earn from a largely long-only institution like us," said one firm. "It feels like a real slap in the face."

It's thought that the fees doled out to banks and institutions on HSBC's recent £12bn issue came to more than £300m. JP Morgan Cazenove and Goldman Sachs, the lead underwriters on the deal, are reported to have charged fees of 2.75 per cent on the amount insured. A further 14 institutions are thought to have participated in the sub-underwriting process.

Hammerson, the FTSE property company, recently raised £600m in a rights issue with the lead underwriting banks – Citi and Deutsche Bank – thought to have paid around 1.75 per cent in sub-underwriting fees to pass on the risk to others.

One large investment bank said: "The fees are pretty good so we can understand why institutions want to get in on the act. But I really don't think there is any bias toward hedge funds."

Institutions have soaked up a large part of more than £25bn worth of rights issuance from British companies so far this year, with some estimates suggesting the amount raised could hit £50bn by the end of 2009.

But signs of weariness have recently emerged. Property company Quintain had to abandon a £100m cash raising last month after investors failed to back the issue. A share placing from Pearson, publisher of the FT, also failed after a muted response from investors.

Mecom, the media company run by David Montgomery, former chief executive of Mirror Group, said last week that it planned to raise £140m. And Findel, the home shopping supplies group, said it had the support of institutional shareholders for a rights issue.

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