Going right - Hong Kong Inc.’s affection for rights issues likely at six-year high

Data InsightECM Explorer 2 June

Going right - Hong Kong Inc.’s affection for rights issues likely at six-year high

Rising interest rates rise and languishing share prices – which are testing fresh 2023 lows – have taken a huge toll on public equity fundraisings in Hong Kong.

But rights issues have managed to defy market headwinds to become a newfound darling for many chief financial officers in the city, which may raise over HKD 39bn (USD 5bn) from existing shareholders this year if all the deals announced so far transpire before we finally get to leave 2023 behind. 

And that would make 2023 the best year for Hong Kong’s rights issues market since 2017.

“Rights issues offer controlling shareholders a chance to snap up bargain shares while avoiding any dilution risk (for participating shareholders),” said a Hong Kong-based investment banker. 

Many companies are constantly exploring cheaper funding options to build up war chests for M&As and solidify balance sheets by deleveraging. Such needs have become all the more crucial as markets turn sour.

To some issuers, rights provide cheaper weighted average cost of capital versus, say, debt financing especially when rates are high. Soliciting money from existing shareholders is also a more predictable process, compared with other equity financing means that is done typically via accelerated bookbuilds.

It takes two to tango.

Existing shareholders are happy to chip in when share prices cheapen, believing that shoring up long-term strategic cash piles now will help companies act faster when opportunities arise.

Hong Kong has priced 19 rights issues to raise USD 2.76bn so far this year, 72% higher than the USD 1.6bn raised from 12 issues in the same period last year, Dealogic data show.

A 72% growth is certainly something worth jealousy from banks focused on the initial public offerings (IPO) or follow-ons market. (Graph below)

Among the rights issues priced so far this year, the most high-profile has been real estate investment manager Link REIT’s [HKG: 823] HKD 18.8bn (USD 2.4bn) offer priced in March. That was LINK REIT’s first direct equity fundraising since going public in 2005, and was Hong Kong’s largest rights issue since Standard Chartered's [HKG: 2888] USD 5.1bn deal in 2015. 

“Post the rights issue, Link REIT will have secured funding that enhances its financial flexibility to capture accretive investment opportunities as the real estate markets reprice,” the company said in a statement issued earlier this February, adding that it aims to diversify portfolios and grow assets under management (AUM). 

The largest Hong Kong-listed REIT has begun early-stage discussions with potential investment targets, focusing on non-discretionary retail and logistics in Asia Pacific, This news service reported. In March this year, it acquired two retail assets in Singapore and has targeted three warehouse assets in mainland China for an acquisition.

Link REIT’s rights, offered at HKD 44.2 per share, or a 29.6% discount to the closing price on the last trading day before the announcement, were oversubscribed upon pricing in March, as announced. The REIT’s share price has fallen by 4.7% as on 30 May since the rights offer got priced.

According to Dealogic, of 270 Hong Kong rights deals priced over the past 10 years, the steepest discounts to theoretical ex-rights price came in at 63.05%, when Hao Tian Development Group Ltd [HKG: 474] sold a USD 26m rights offer. Fifty-two issuers priced their discounts in the 20%-30% range, and 18 deals came from the property sector, after the finance sector’s 55 transactions.

Solid pipeline 

The deal pipeline is looking promising, for now, with 20 rights issues announced so far this year yet to be priced, according to Dealogic. The largest among them is Guangdong-headquartered real estate developer Yuexiu Property’s [HKG: 123] HKD 8.36bn (USD 1.065bn) issue, announced on 20 April in a statement.

M&A is also a key factor behind Yuexiu Property’s rights offer.

“The rights issue will…help the company to explore more key projects and investment opportunities in mainland China,” said the company in the April statement.

Net proceeds will be deployed for investments in core cities in the Greater Bay Area, the Eastern China Region, and other key provincial capital cities in China, Yuexiu Property said.

As of 31 December 2022, Yuexiu Property’s cash and cash equivalents amounted to CNY 21.8bn (USD 3bn) while its net gearing ratio stood at 62.7%, according to its latest annual results.

This news service flagged on 17 March the property developer’s opportunistic approach to distressed M&A.

Yuexiu Property’s issue is being offered at HKD 9 per rights share, a 28.3% discount to the last closing price, as announced. The deal is expected to be completed on 2 June.

To be fair, for issuers, rights offers are a relatively lengthy process compared with, say, an equity placement. And to take advantage of lower share valuations if the issuers on the pipeline are considering any acquisition, it maybe a right thing to do by moving now than later.

Please find below the top 10 largest rights offers yet to be closed. 

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