ASX opens book on capital raisings
What used to be called underwriting is called equity capital markets inside the big investment banks these days. By either name it has been a river of gold, however - and the ASX will dip its oar in on October 8, when its new platform, ASX BookBuild, finally goes live.
ASX announced a year ago that it would offer the new platform for share issues, using technology developed by a former Macquarie banker, Ben Bucknell.
Some of the investment banks saw it as an invasion of their turf, and an attack on a system that was working well.
Over $113 billion had been raised by companies through share issues and placements in the two years to June 2010 for example. Almost all of it had been applied to pay down debt, de-gearing and de-risking the corporate sector during and after the global financial crisis.
UBS led the capital-raising charge, utilising what had been regarded for years as the best equity capital market (ECM) address book in the local industry to connect companies with institutional investors.
While brokers and investment bankers can and do team up in big raisings and floats, ECM operations are private share distribution systems, however. ASX and Bucknell's company, On-Market BookBuilds, have created an online, open-access alternative.
Shareholders in companies making issues on the private platforms risk either missing out or getting fewer shares than they want if they are not a favoured client of the firm that is running the process. A book-build sets the price, but key clients know before it begins that if they meet it, they will get the shares they want. Smaller companies that are not clients of the big investment banks meanwhile find it harder to get share issues away, because the brokers that support them have smaller distribution lists. These issues were laid bare during the financial crisis, and it was not just a big-company/small company, institutional shareholder/retail shareholder divide. Managers of small and medium-sized investment funds also found themselves shut out of major raisings, or rationed.
The ASX BookBuild facility is in theory at least a game-changer. Instead of being run behind closed doors, book-builds on the platform will be conducted and be able to be viewed on an ASX-constructed internet interface. The potential buying catchment for the issue will not just be investors and institutions in a single ECM contact book, but the entire market: any broker or investment bank will be able to bid, either in its own right, or on behalf of clients.
About 170 companies as well as institutions and groups including the Business Council of Australia, the Australian Institute of Company Directors, Australian Shareholders Association and Australian Council of Superannuation Investors have been briefed about the system by the ASX and Bucknell and his team, which includes former Macquarie ECM head Bill Best, former UBS head of government bond proprietary trading Rosemary Kennedy, and a former Asian head of product development for Standard & Poor's, Tim Eisenhauer.
The response has been positive overall, although it has resulted in some fine-tuning of the platform, for example to incorporate two priority allocation stages to enable companies to lock in issue shares for key investors as long as they meet the issue price set by the bookbuild process.
The platform is being marketed as an extra tool for share issues rather than a head-on assault on a key investment banking profit centre, and in the short and medium term that will be the case.
Demand for it should be strongest among smaller companies that have struggled in the past to get issues away through conventional channels. Larger companies won't change horses overnight.
Shares issued on the platform are also going to be settled on the ASX's primary market facility rather than its secondary market facility, where settlement risk is insured in effect by the ASX's clearing house.
Issues on the new ASX book-building platform are not going to be underwritten by the ASX, in other words, and given that, some companies may find the fee scale too high. There is a base fee of only $25,000 on amounts up to $1 million and levies below a half a per cent on amounts above $250 million, but the levy is steeper at $25,000 plus 1.5 per cent for amounts between $1 million and $24 million, rising to $385,000 plus 1.25 per cent for amounts between $25 million and $50 million, and $697,500 plus 0.6 per cent between $50 million and $100 million.
Some companies may also worry that the system gives them less control over who buys in. But most will consider it a "can't hurt, might help" development.
It may get traction, and if it does it could drive issue costs down, as the ECM houses compete on price (and generate new income for the ASX in the process). It may also fail to get traction: the existing system isn't badly broken. If that happens, however, Bucknell and the ASX can always consider lowering the fee scale.