THE DISTILLERY: Funke Kupper's cash pile

Some scribes are bemused by the ASX's 'excessive' capital raising, while another explains it's trying to keep its mega-merger dream alive.

ASX’s Elmer Funke Kupper has stunned some onlookers with a $553 million capital raising that looks somewhat excessive considering the balance sheet and definitely early considering its purpose. Does the boss have something else in mind? This morning, Australia’s business scribes investigate.

The Australian’s Andrew White says Kupper, who’s in his second year at the top of Australia’s market operator, has managed to have a few big things falls his way.

“The man who began work at the ASX as the rival Chi-X was finally opening its doors for business in 2011 has since turned around much of the threat posed by competition and the huge and ongoing reregulation of the finance industry here and abroad. So it has to be wondered why he has risked some of that capital on an unexpected and surprisingly large share issue that will leave the exchange operator debt-free and with cash to burn.”

Fairfax’s Malcolm Maiden writes that the two clearing house businesses that will receive over four fifths of ASX’s capital raising dosh don’t make enough coin in their own right to justify the current investment.

“ASX chief executive Elmer Funke Kupper was right, however, when he said on Tuesday that there was really no choice. ASX needs the capital injection to stay in the global game, and keep its hopes of a mega-merger with a big foreign exchange alive. Funke Kupper's TISNA (there is no alternative) comment was directed firstly at a new regulatory hurdle the exchange faces. It needs to boost the quality of the capital in its equities clearing business, and boost both the quality and amount of default funding inside its futures clearing business to meet tough new global capital standards that are emerging in the wake of the great global financial debacle.”

The Australian’s John Durie points out that ASX has a gearing ratio of just 8 per cent, so why the hell are they raising?

“It seems what has caught the market, and one suspects the ASX, by surprise was the tighter capital rules being imposed by the EU as opposed to global guidelines set by IOSCO (the International Organisation of Securities Commissions). In this scenario it is best to aim for the top when you can, and with his monopoly clearing base Funke Kupper can do just that. So he has moved swiftly to ensure the ASX is financially fit to play in the big league against global players like CME and the Hong Kong Exchange, which are four and three times as big respectively.”

Business Spectator’s Stephen Bartholomeusz notes that there were three reasons the ASX listed for the raising, the first two of which are fresh equity for ASX Clear (Futures) and replacing a $250 million debt facility. But the most important issue is the Europe thing.

“At the moment ASX’s clearing houses are required by the Reserve Bank to have the resources to be able to withstand the default of the clearing participant to which it has the biggest credit exposure. The European authorities, however, are moving towards requiring central counterparties to have the resources to withstand the default of the two participants to which it has the biggest exposures. While the US hasn’t flagged a similar requirement it is also tightening the rules for clearing and generally regulators, post-crisis, are trying to lower the risks within the global trading and clearing of derivatives, indeed of most financial activity.”

The Herald Sun’s Terry McCrann welcomes the ASX’s decision to opt for “as ‘pure’ a pro-rata issue, fair to all its shareholders, as possible in the modern era”.

The News Limited veteran just wishes the market operator would insist the rest of corporate Australia, like the companies listed on its own exchange, follow that example.

In other company news, The Australian’s Bryan Frith says Equity Trustees missed a crucial window to win the approval of Trust Company, it’s takeover target, which now looks destined for the arms of Perpetual.

Speaking of takeovers The Australian Financial Review’s Chanticleer columnist Michael Smith reports that US giant Archer Daniels Midland has given GrainCorp the green light to spend $250 million locally before it have received approval from the Foreign Investment Review Board. That’s to at least some degree appease the local farming lobby.

Meanwhile, Fairfax’s Elizabeth Knight says the Australian dollar is now in a “classic bear phase”, with any hint of negative news disproportionately hitting it.

Talking of downside tendencies, The Australian Financial Review’s economics editor Alan Mitchell brings word from Ken Henry that Australia is more vulnerable to an economic downturn “because it failed to continue the economics reforms of the 1980s and 1990s”. Best of luck Mr Abbott.

And finally, The Australian Financial Review’s Karen Maley writes that investors are watching the movements of Beijing closely, because the Chinese government is trying to make sure its curbs to credit growth don’t unnecessarily impact the economy’s growth.

If this move were in a gymnastics routine, that move would have a high degree of difficulty – probably an E, F or G on the A to G scale.

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