Trowers & Hamlins

Rights issues set to remain an important tool despite credit crunch

The use of rights issues in the Gulf is beginning to recover after the correction of the region’s stockmarkets last year, says Trowers & Hamlins, the international law firm.

According to research by Trowers & Hamlins, the amount raised by rights issues on equity markets in the Gulf Co-operation Council (GCC) region [1] last year (between July 2006 and June 2007) fell 69% to US$4.6 billion from $14.7bn in the same period the previous year.

The region’s GulfBase GCC stockmarket index peaked at just under 9600 points at the end of February 2006, falling to around 4650 by the end of January 2007.

However, the 2006/7 figure is still more than was raised in 2004/5, when it was $4.36bn, and far more than in 2003/4 when it was just $147 million.

Trowers & Hamlins points out that the two biggest rights issues of 2007 so far have been announced in recent weeks.

This month Saudi Arabia’s Riyad Bank announced plans to raise US$3.5 billion through a rights issue. At the end of August, National Bank of Kuwait, which made a rights issue in October last year, announced that it intends use a further rights issue to increase its capital by 20% by the end of this year, raising US$1.45bn.

Comments Rupert Copeman-Hill Partner of Trowers & Hamlins; “Last year’s correction in the Gulf stock markets really knocked the wind out of rights issues. As the stock markets fell investors just weren’t willing to pick up extra shares at what they saw as inflated prices.”

“Companies also weren’t willing to issue shares at the kind of deep discounts that would have been needed to attract investor interest. So we did get a bit of a Mexican stand-off and issuance began to dry up.”

“For many ambitious corporates it was just easier to turn to the debt and sukuk markets for extra funds.”

“Now that stability has returned to the region’s stock markets investors are happier to add to their holdings through rights issues and corporates are more comfortable with the valuations at which they can now issue new shares.”

“If the region’s markets continue to perform well it seems certain that we are going to see more companies dusting down their plans to tap the stock market.”

“From being widely overlooked just a few years ago, rights issues look set to remain a viable alternative to debt issuance, as more companies seek to take advantage of their strong valuations rather than add debt to their balance sheets,” says Rupert Copeman-Hill. “Demand from investors for shares in Middle Eastern businesses should also remain strong, particularly since oil prices remain at record highs.”

He adds, “A large part of the funds raised through rights and bond issues in the last few years has been used to fund M&A activity both at home and in the wider Middle East region. Now companies are starting to look further afield for acquisition opportunities – to Asia, Europe and North America. We expect to see this trend continue.”

For example, in May Saudi Basic Industries Corporation (SABIC) announced the acquisition of GE Plastics, the global plastics division of General Electric, for $11.6 billion. National Bank of Kuwait announced in July it was taking a 40% stake in Turkish Bank for $160 million. Abu Dhabi National Energy (Taqa) is currently bidding US $4.9billion for PrimeWest Energy Trust of Canada which will be its third Canadian acquisition in a year.

Trowers & Hamlins’ research also shows that the financial services sector accounted for by far the largest proportion of rights issues in the Gulf region by value, at 70%, followed by Transport and Real Estate, at 11% each.

[1] The GCC is made up of Saudi Arabia, Kuwait, Qatar, Bahrain, Oman and the UAE