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Rights and wrongs

Created:
30 April 2008
Written by:
Algy Hall

Massive rights issues from the UK banking sector had been widely anticipated but seeing them come through is nevertheless an awe-inspiring spectacle. First RBS hit shareholders with the largest ever UK rights issue tapping them for a cool £12bn, then HBOS put its cap out for £4bn. Inevitably the speculation is centring on who will be next in line, with Barclays and Bradford & Bingley the most favoured contenders. But, as trading conditions deteriorate for an increasingly wide range of sectors, it's unlikely to only be the banks calling on shareholders for large lumps of cash to plug holes.

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Rumours have abounded that housebuilder Barratt Developments could need to ask shareholders for a bit of help when it issues a trading update on 14 May. Its shares fell 7 per cent last Friday as these rumours swirled, illustrating the market's nervousness and the potential for a cash call to hit both shareholders' equity portfolios as well as their cash reserves. It's not surprising that speculation is focusing on the financing needs of housebuilders given the so-called 'buyer’s strike' in the housing market, which has seen mortgage approvals in March drop to 64,000, the lowest level since records began in 1993.

However, it is Barratt's perceived financial weakness that has singled it out for special treatment. Not only is trading suffering, but debt is relatively high and the value of its land bank could potentially plummet as house prices fall. Regardless of whether a rights issue is needed, the share price ructions emphasise the growing importance of balance sheet strength, robust cash flows and flexible cost bases for companies in cyclical sectors, from restaurant groups to property companies to recruiters.

It's less clear cut whether a rights issue is really such a bad thing once it’'s announced. Since RBS made its £12bn request, its shares are down. But there's a school of thought that says that, by the time a company resorts to a rights issue and faces the accompanying jeers, the worst is usually over.

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