Goldman Sachs, JPMorgan Boost Rights Offer Fees as Risks Grow

By Elisa Martinuzzi

March 3 (Bloomberg) -- Goldman Sachs Group Inc. and JPMorgan Chase & Co. are charging companies 50 percent more than what they were a year ago to guarantee rights offers to compensate for the risk they may be forced to buy unwanted stock.

HSBC Holdings Plc will pay Goldman Sachs, JPMorgan and eight other firms 2.75 percent in fees from the 12.85 billion pounds ($18.3 billion) the London-based bank plans to raise. Royal Bank of Scotland Group Plc paid underwriters led by Goldman Sachs, Merrill Lynch & Co. and UBS AG 1.75 percent for its 12.3 billion-pound sale in June. On average, fees have jumped to 2.9 percent from 1.9 percent in 2008, filings show.

The risk for underwriters in rights offers is investors balk, leaving the banks to buy what’s left over. That could more than wipe out any fees on a transaction. Morgan Stanley and Dresdner Kleinwort Ltd. were among firms left with as much as 92 percent of Edinburgh-based lender HBOS Plc’s 4.2 billion-pound sale in July after the shares fell below the offer price.

“In tumultuous times such as these underwriting becomes riskier and sales more complicated,” said Giorgio Questa, a finance professor at London’s Cass Business School and former investment banker at Italy’s IMI SpA. “The last thing banks would want is to remain on the line for weeks,” he said.

Xstrata Plc, the largest exporter of coal used by power stations, and Snam Rete Gas SpA, Italy’s gas grid operator, are among companies that have announced plans to sell stock over coming months. Enel SpA, Italy’s biggest utility, has also said it’s considering a stock offering, without giving details.

Officials at JPMorgan and Goldman Sachs in London declined to comment.

Eight Weeks’ Wait

European corporate law and securities rules typically require companies to offer existing shareholders first refusal over new stock. In a rights offer, a company gives existing investors the option to buy new stock, often at a discount. Shareholders can choose to buy the shares or sell the rights.

The process takes time, as long as eight weeks on some sales. Companies often need to convene shareholder meetings to vote on the plan and then give buyers a few weeks to decide whether to purchase shares. HSBC, Europe’s biggest bank, will ask investors to vote on the plan March 19 before it completes taking orders for the stock on April 3, almost five weeks after yesterday’s announcement. RBS, the Edinburgh-based owner of the U.K.’s NatWest bank, took seven weeks to complete its offering.

The underwriters face an unprecedented risk that the market may turn against them. Stock market volatility, measured by the VIX, or Chicago Board Options Exchange Volatility Index, is at 49, about 50 percent higher than last year’s average.

‘Not Out of Line’

Deutsche Bank AG and JPMorgan are underwriting part of Xstrata’s 4.1 billion-pound rights offer. The banks are charging about 3.3 percent for their share of the underwriting, the offer document shows.

“The fees are not out of line with our previous rights offers,” Claire Divver a London-based spokeswoman for Xstrata said in an interview. Xstrata paid about 2.75 percent in offerings in 2003 and 2006, said Divver. The fee is bigger this time because the company has had to hold a shareholder vote, drawing out the offer period, she said.

Securities firms are using the higher fees to lure other financial institutions to help them spread the underwriting risk. Banks are passing on fees of as much as 2 percent to so-called sub-underwriters, often investors in companies that guarantee part of the sale for the bank. That fee has more than doubled from the 1 percent sub-underwriters historically received.

Cookson Group Plc, which is raising 255 million pounds in a rights offer set to be completed tomorrow, has lured its biggest shareholders, Standard Life and Aviva Plc, to sub-underwrite its sale. Merrill Lynch & JPMorgan are managing the offer.

Rights offerings are providing a lone bright spot for equity capital markets bankers amid the slowest year for stock sales since 2003, Bloomberg data show. That year, fees for rights offers peaked at 4.3 percent, the commission Allianz SE paid on a 4.4 billion-euro ($5.5 billion) offering, a sign fees could yet rise further.

To contact the reporter on this story: Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net