Share placements are issue of shares to a particular group of potential investors. Typically, these investors are not existing investors. This is probably because the existing substantial share holders do not want to do a rights issue which would mean putting in their own cash. (Think how China Merchant Pacific, whose owner owns 81% of it doesn’t want to do a rights issue because they will end up paying it mainly by themselves)
The company that issues usually do this to shore up their balance sheets to
- Fund future expansion. They see potential to buy assets that can create a higher return on investment
- Pay off debts. Debt interest rates get too expensive. Their net asset value have gone down such that their debt to asset ratio worsen, this could eventually affect their credit rating which will affect future debt purchase
- Cost of equity is cheaper than cost of debt. With debt they have to pay an interest which may not be cheap, equity dividends are not mandatory and thus may be more attractive
What it means to existing investors is that their share of profit gets diluted. But that may not always be the case.
Chance to purchase yield accretive assets
Recently we seen many yield stocks ran up a lot in share price. Two good examples are First REIT and china merchant pacific.
Prior to this First REIT was yielding 8.2% in dividends. Here you will see their asset yield is 6.05%.
CMPacific is a special case. When you own 81% of the company and you really want to attract investors yet inject cash there is really not a lot of choice.
With the dividend yield that high, First REIT finds it difficult to identify prospective assets that yields higher than 8.2%.
With the price run up from 77 cents to 92 cents the prevailing dividend yield gets compressed.
Prospective assets have a lower yield to beat now. First REIT would just need to find assets yielding higher than 6.8%.
In this example, First REIT will raise 92 mil to buy an asset yielding 7%.
The new asset size increases, so is the total equity. Although existing share holders get diluted but as you see, the dividend per share went up and so is the dividend yield from 6.85% to 6.87%.
When share price didn’t run up
Without the share price run up, the same placement of 92 mil and a purchase of a 7% yielding asset will reduce dividend yield from 8.18% to 7.99%.
First REIT will have to buy an asset yielding 9%. Dividend yield would increase from 8.18% to 8.31%.
Partially finance by debts
Companies can also choose to do a part placement and debt issue.
In this example share price is still low, but First REIT choose to place 46 mil and finance the other 46 mil with debts.
The end state is both total equity and debt increases and dividend yield increase from 8.18% to 9.03%
No asset buy, a rescue operation
The most diluting move would be to do a. 92 mil placement and not buy any asset. This usually happens when there is a rescue to replace debt with equity. The existing share holders will lose out.
MI-Reit wants unit holders to back a $430-million rescue package involving a share placement to ‘cornerstone’ investors, a rights issue and $215 million in loans.
It needs to raise cash to refinance $226 million in loans and meet a $90-million obligation to buy the 1A International Business Park property by the end of the year.
In 2009, deep in the great financial crisis, Aims Amp Industrial REIT, then as MI REIT, wanted to do just that, shoring up their balance sheet with rights issues, placements that would ultimately proof dilutive.
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