Europe Rights Issues Lift Stock Supply for First Time Since '05

By Alexis Xydias and Sarah Jones

Feb. 16 (Bloomberg) -- The amount of stocks in Europe is increasing for the first time since 2005 as the financial crisis forces companies to raise new money from shareholders. If history is a guide, higher prices for equities will follow.

Xstrata Plc, the region’s biggest zinc producer, Cookson Group Plc, the world’s largest maker of ceramic linings for metal smelters, and Swedish bank SEB AB rose more than 20 percent after tapping shareholders this year. Prices for 72 percent of 391 European companies with so-called rights issues in the past decade advanced in the next six months, according to data compiled by Royal Bank of Scotland Group Plc.

Companies in the region may raise 300 billion euros ($386 billion) this year, excluding financial institutions, according to New York-based Goldman Sachs Group Inc. The increase would end three years in which buybacks and mergers and acquisitions outpaced equity sales. Investors say the ability to raise money is a bullish sign, showing corporations have the backing of their biggest shareholders.

“Equity rights issues contain the seeds of their own success,” said Adam McConkey, who helps oversee $1.2 billion as senior investment manager at Gartmore Investment Management in London. “Where fear takes over the business, the stock starts to show elements of distress. So improvement of the prospects will see a significant improvement in the share price.”

Net Debt

A total of 283 companies of the 391 tracked by Edinburgh- based RBS since January 1999 rose in the six months after they announced plans to seek capital from current shareholders by offering them the rights to buy a proportionate number of shares in a new issue at a discount.

Of those, 112 added between 10 percent and 50 percent, and 87 had bigger gains. The Dow Jones Stoxx 600 Index, a benchmark gauge in Europe, fell 32 percent in the period covered by the RBS study, or about 1.8 percent on a six-month basis, data compiled by Bloomberg show. About half of the companies in the Stoxx 600 with share-price data spanning the entire period dropped, Bloomberg data show.

Companies in the Stoxx 600 ended last year’s first half with total net debt of 9.83 trillion euros, according to data compiled by Bloomberg. Compared with annual year-end figures, that would be the widest gap between debt and stock market capitalization since at least 2001, the data show.

New capital is needed after the Stoxx 600 slumped 46 percent in 2008, the worst drop in its two-decade history. Stocks fell worldwide as financial companies racked up $1 trillion in credit-related losses and Europe, the U.S. and Japan entered the first simultaneous recessions since World War II.

HBOS Tumbles

Sales that investors deem badly timed accelerated stock losses.

HBOS Plc held the European rights offer with the largest value of unsold stock this decade. Shareholders claimed only 8 percent of its 4 billion-pound ($5.74 billion) sale in July after the credit market freeze helped push the shares below the price of the offering. Edinburgh-based HBOS, the U.K.’s biggest mortgage lender, came close to collapse and was taken over by London-based Lloyds TSB Group Plc last month.

“The market has to digest these rights issues, but I would not rate this as a negative development,” said Norbert Janisch, a Vienna-based manager at Raiffeisen Capital, which participated in last year’s 1.8 billion-pound sale by London-based Standard Chartered Plc and the 1.2 billion-euro offering by Finmeccanica SpA in Rome. “If a company gets into a position where they need a rights issue, if they act swiftly the outcome can be a positive one.” Raiffeisen oversees $62 billion.

2009 Rights Offerings

So far in 2009, the 10 companies in the Stoxx 600 that said they would hold rights offerings have risen 3.8 percent on average since their announcements, data compiled by Bloomberg show. The stocks had slumped an average of 17 percent from the start of 2009 until the offerings were announced, the data show.

Xstrata jumped 23 percent to 765 pence since announcing a 4.1-billion pound rights issue on Jan. 29 to pay debt and buy coal assets from Baar, Switzerland-based Glencore International AG, its largest shareholder. Zug, Switzerland-based Xstrata had tumbled 86 percent from a record 4,420 pence reached last May.

Cookson said on Jan. 29 that it aimed to raise 240 million pounds to reduce debt as steel demand slumps. The shares soared 56 percent. Stockholm-based SEB, the second-biggest bank in the Baltic states, said on Feb. 5 it planned to raise 15 billion kronor ($1.8 billion) as Estonia, Latvia and Lithuania enter their worst recession since gaining independence in 1991. The shares have since jumped 32 percent.

Gartmore’s McConkey said investors should avoid companies whose finances are unlikely to improve even though they are offering discounted shares. Most of this year’s offerings have met his criteria.

“The indications are that the market is being prepared and is happy to write checks further down the risk profile than I or other investors had imagined a month ago,” he said.

To contact the reporters on this story: Alexis Xydias in London at axydias@bloomberg.net; Sarah Jones in London at ahaigh1@bloomberg.net.