The Mayne Report: remembering GFC capital raising deluge and what a contrast with Transurban!

Remembering the GFC – a disaster which turned into a capital raising goldmine

There have been some great reads on the 10^th anniversary of Lehman Brothers falling over. Alan Kohler was spot on with his Overview wrap highlighting the importance of “breaking the buck” and Richard Gluyas provided some excellent and amusing insights into the Big Four banks with this feature in The Weekend Australian.

My GFC was an incredible ride which started with launching The Mayne Report in October 2007 shortly before running as an independent against Peter Costello in the seat of Higgins at the 2007 Federal election on a platform of getting tough on the banks.

The Mayne Report was focused on covering AGMs and shareholder matters so I spent much of 2007 putting together the world’s biggest small share portfolio. The strategy was to own any ASX listed company worth more than $50 million or that looked vaguely interesting or controversial, so there could be engagement as a shareholder rather than a journalist.

Specifically, this unfortunately involved investing the minimum $500 into no less than 368 stocks in 2007. It’s painful to go back and read the full chronological account of that exercise. August 2007 was the biggest month with about $55,000 spent buying into 104 different companies right near the top of the market.

With three staff and little revenue, The Mayne Report was burning cash through 2008, as the same time as the share market was tumbling.

By March 2008 the world’s biggest portfolio was already $50,000 underwater but that was only the beginning given that heroic additions to the portfolio continued through until October 2008 when it peaked at almost 800 stocks. Talk about trying to catch a falling knife.

Click here to see the circa 500 share trades in calendar 2008 as the GFC was firing up.

You’ll notice lots of buying at the start of the year before I literally ran out of capacity as the crunching market ate away at the leverage available on the Commsec margin loan. The selling accelerated towards the end of the year after Lehman Brothers collapsed, when the decision was made to no longer hold the $500 investment but instead slowly sell down to a token holding of 10 shares which carried limited market risk.

But this was all too late for most of the exposures and, as an example, I ended up losing more than $3000 investing $500 in 11 different Babcock & Brown vehicles. Oh dear!

When the market bottomed in March 2009, I was out of cash and had even taken out a loan to buy a new second hand car, although at least we didn’t have a home loan. My wife’s board fees as a director of the RACV were keeping us going and our two production staff had started doing contracting work making videos for Myer to try and bring in some extra cash to the business.

Then, out of the blue, came an avalanche of in-the-money capital raisings which presented a once in a life time opportunity for quick profits and literally kept The Mayne Report staffed through until the end of 2010.

It also led to our busiest ever year in 2009 when there were more than 600 trades being a combination of completing capital raising plays, tax-loss selling, reducing $500 exposures to 10 shares and also getting on registers which might be prospective for doing a capital raising.

It took the staff many hours to tap out at the time but here is 24 pages of text listing more than 600 share trades in 2009.

How the magnificent run of capital raising profits unfolded

In terms of how the gains unfolded, there were only about $10,000 in capital raising profits taken in the six months up to when the market bottomed in March 2009, but the paper losses were still in excess of $100,000.

Then the first big windfall came with Fairfax Media on April 7, 2009 – a $27,500 pre-tax profit courtesy of applying for a big whack of overs in a discounted non-renounceable offer that was well in the money.

That was the moment when the GFC suddenly transformed from a threat to a major opportunity and from there it was an avalanche of windfall gains based on two distinctive offers: the $15,000 share purchase plan to all retail shareholders no matter the size of their holding and the non-renounceable entitlement offer where participants can apply for “overs” to pick up any shortfall from non-participating retail shareholders.

The quick-fire gains unfolded as follows over the 16 month period from March 2009 until June 2010 as the GFC delivered gross paper gains of about $265,000 on 168 capital raising deals. Here is a list of the individual deals which delivered more than $1000:

GFC capital raising offers where a tiny investor made good money

March 6, 2009
Wesfarmers: bought 1000 at $13.50 through entitlement offer with heavily scaled back overs after borrowing from friends to apply for $200,000 worth and then sold 506 at $16.80 and 500 at $16.72 for a profit of $3160.

March 23, 2009
Newcrest Mining: bought 198 at $27 through $5000 share purchase plan and sold 198 at $34.20 for profit of $1425.

March 24, 2009
Suncorp: bought 2200 at $4.50 in entitlement offer with unlimited overs and sold 2200 at $6.30 for profit of $3960. Should have applied for much more.

April 7, 2009
Fairfax Media: bought 83,333 at 75c in entitlement offer through two accounts and sold for average $1.08 to make $27,500 but about $8000 went to various financiers and under-writers.

April 16, 2009
IBA Health: bought 36,200 at 55c in entitlement offer with overs and sold 36,200 at 63c for profit of $2896.

April 22, 2009
Ceramic Fuel Cells: bought 500,000 at 5c in entitlement offer with overs, sold 200,000 at 6.3c, 47,704 at 6.1c and 240,000 at 6.2c for profit of $6150.

May 1, 2009
Diversified United Investments: bought 5000 at $2 in $10,000 share purchase plan and sold 5000 at $2.30 for $1500 profit.

May 6, 2009
Avexa: bought 261,000 at 7c through entitlement offer with overs and sold 261,000 at 9.4c for profit of $6264.

May 7, 2009
Crane Group: bought 2000 at $7.50 through two marginally scaled back share purchase plans and sold for average $9.35 to make $3700.

May 8, 2009
Peet: bought 22,000 at $1.10 through entitlement offer with overs, sold 7,000 at $1.42 and 15,000 at $1.43 for profit of $7190.

May 14, 2009
Onesteel: bought 20,000 shares at $1.80 in entitlement offer with unlimited overs and sold for average $2.20 generating a profit of $8000. Should have gone harder.

May 19, 2009
AXA Asia Pacific Holdings: bought 3,508 at $2.85 in share purchase plan and sold 3,508 at $3.84 for profit of $3472.

May 22, 2009
Fletcher Building: bought 1226 at $4.15 in scaled back share purchase plan and sold 1266 at $5.09 for profit of $1152.

June 5, 2009
Horizon Oil: bought 100,000 at 10c in share purchase plan and sold 100,352 at 17c for $7000 profit. This was the highest margin SPP play of the GFC.

June 5, 2009
Macquarie Group: bought 564 at $26.60 in share purchase plan and sold 554 at $37.20 for profit of $5978. 

June 5, 2009
Aristocrat Leisure: bought 3077 at $3.25 in share purchase plan and sold 3,087 at $3.69 for profit of $1046. 

June 9, 2009
Bluescope Steel: bought 48,387 at $1.55 in entitlement offer with unlimited overs various parcels for an average of around $2.65 for crystallised profits of $47,800. Easily the best deal of the GFC.

June 12, 2009
Adelaide Brighton: bought 5600 at $1.78 in share purchase plan and sold 2,881 at $2.25 and 2800 at $2.33 for profit of $2894.

June 16, 2009
Bunnings Warehouse Property Trust: bought 13,333 at $1.50 in entitlement offer with overs and sold 13,000 at $1.629 for profit of $1677.

June 17, 2009
Santos: bought 2675 shares at $12.50 in entitlement offer with overs and sold for $14.10 for profit of $4280.

June 17, 2009
Seek: applied for $5000 SPP at $2.60 but scaled back to 1030 shares. Sold for $4.11 so profit of $1555. 

June 18, 2009
Stockland: bought 33,398 at $2.70 in entitlement offer with overs, sold 3000 at $3.07, 10,407 at $3.01, 5000 at $2.81 and 14,991 at $3.13 so overall gross profit $11,332.

June 22, 2009 
Billabong: bought 4000 shares at $7.50 in entitlement offer and sold 4000 at $8.20 for gross profit $2800.

Total 2008-09: $165,405 gross profit on 46 capital raising deals.

July 6, 2009
White Energy Company: bought 2333 at $1.50 in share purchase plan and sold 2618 at $2.19 for a profit of $1609. 

July 7, 2009
Automotive Holdings: bought 12,500 at $1.20 in share purchase plan and sold 12,500 at $1.44 for profit of $3000. 

July 8, 2009
Ausenco: $45,000 into three $15,000 SPPs at $3.20 but scaled back to $6000 and made profit of about $1200. 

July 10, 2009
Mirvac: applied for $10,000 through entitlement offer at $1 and sold for $1.10 to make a profit of $1000.

July 13, 2009
ANZ: bought 2074 ANZ at $14.40 through two SPPs and sold 1037 at $15.80 and another 1037 at $16.10 so overall profit $3214. 

July 27, 2009
Macarthur Coal: bought 7500 shares at $6 each for $45,000 through 3 different $15,000 SPP offers. Sold 1000 at $7.464, 2500 at $7.36, 2575 at $7.355 and 1490 at $7.66 for gross profit of $10,826.

July 27, 2009
Karoon Gas: bought 746 at $6.70 in $5000 SPP and sold 800 at $11.16 for SPP profit of $3327.

August 6, 2009
GME Resources: applied for $3000 at 5c and sold all 60,000 at average 6.8c to make a profit of $1080.

August 6, 2009
Cockatoo Coal: bought into $15,000 SPP at 33c and sold 45,500 shares at 37.1c to make profit of $1865.

August 14, 2009
Roc Oil: bought 21,000 at 71c in SPP and sold for 77c to make profit of $1440.

August 14, 2009
Innamincka Petroleum: bought 71,000 at 20c in SPP and sold for 22c for a profit of $1420.

August 21, 2009
Asciano: put $30,000 into three $10,000 SPP entitlements at $1.10. Scaled back by 65% and exited for profit of $3626. 

August 31, 2009
National Australia Bank: put $38,000 into three NAB SPP offers but scaled back to 394 shares costing $8471 and then exited at $28 to post a profit of $2500.

September 2, 2009
Australand: applied for maximum $40,000 of overs in 40c entitlement offer and got full allocation. Exited at 48c to make profit of $8000.

September 8, 2009
Whitehaven Coal: $15,000 into SPP at $3.05 and exited for $3.45 to make a profit of $1976.

September 9, 2009
Intermoco: $10,000 into $15,000 SPP at 1.5c and exited at 1.7c to make gross profit of $1333.

September 14, 2009
Structural Systems: $15,000 into SPP at 78c which was scaled back by 24% or $3600. Exited at 85c for a profit of $1040. 

September 16, 2009
Bendigo & Adelaide Bank: applied for $30,000 worth of shares across two entitlements in pro-rata offer and allocated 2000 shares at $6.75. Sold for an average $8.29 for a profit of $3083.

September 17, 2009 
Goodman Group: $20,000 into two 1-for-1 entitlement offers at 40c with no scale back and exited for 58c to make a profit of $9000.

September 18, 2009
Energy & Minerals Australia: $15,000 into two entitlements to $15,000 SPP at 21c but scaled back to just $4084 allocation which were sold at average 25.7c for a profit of $914. Also sold 19,450 free options at 7.2c for a profit of $1400 so total profit $2314.

September 22, 2009
Sedgman: $10,000 into $10,000 SPP at $1.30 but scaled back to 2693 shares worth $3500 and exited at $1.695 for profit of $1063.

September 29, 2009
Spotless: $15,000 into SPP at $2.16. No scale back and sold at $2.54 for a gross profit of $2642.

October 7, 2009 
Cougar Energy: exited two scaled back $15,000 SPPs at 8.25c for 9.9c to make a profit of $2600.

October 12, 2009
Healthscope: $15,000 into SPP at $4.19. Exited at $4.59 for a profit of $1431. 

October 16, 2009
Industrea: $15,000 into SPP at 40.92c and then exited at 44.5c for a profit of $1285.

October 16, 2009
Isoft: $15,000 into SPP at 77c and then exited at 86c for profit of $1755.

October 21, 2009
Real Estate Capital Partners: $15,000 into SPP at 14.92c. 15% scale back and exited at 16.5c for gain of $1360.

November 2, 2009
AWB: $40,000 into two entitlements to 1-for-1 offer at $1 with extras. Scaled back to $30,000 and exited at $1.20 for $6000 gain.

November 3, 2009
Elders: $40,000 into two $20,000 SPP entitlements at 15c and received the lot. Exited at 17.5c for gain of $6700. 

November 12, 2009
Capral: applied for $20,000 in entitlement offer at 2.5c with overs and exited 141,000 shares at 4.3c to make a profit of $2500.

November 19, 2009
Praemium: $20,000 into two 1-for-10 entitlement offers at 15c with overs. Exited at average 16.25c for gain of $1600.

December 15, 2009
St Barbara Mines: $15,000 into 3-for-14 entitlement offer at 27c and got the lot. Exited at 29c for gain of $1100.

January 5, 2010
Avexa: $15,000 into SPP at 14c which was scaled back to $12,000. Exited at 16c for gain of $1700.

May 6, 2010
MMC Contrarian: $10,000 into 1-for-1 entitlement offer at 50c with overs. Got the lot. Exited at 55c for gain of $1000.

May 10, 2010
Kings Minerals: $10,000 into 1-for-5 entitlement offer at 6c with overs. Sold 41,375 shares at 8.7c to make profit of $1117.

Total 2009-10: $103,701 profit on 103 deals 

It doesn’t happen like that any more

Ten years later, there are far fewer capital raisings and those that do occur, tend to be more fairly structured so that a tiny shareholder can’t make windfall gains at the expense of other investors.

The biggest loser during the GFC was the retail shareholder who did nothing because in none of the deals listed above was any compensation paid to investors who chose not to participate.

Share Purchase Plans only work if you bother to participate and non-renounceable entitlement offers with “overs” simply transfer the benefit of buying discounted shares from non-participants to those who take their chances and apply for extras beyond their entitlement. A retail bookbuild of the shortfall using price-discovery to maximise the price and compensate non-participants is obviously so much fairer.

How the GFC profits could have been so much greater

Whilst not complaining for a minute about the outcome, looking back, I made two mistakes during the GFC. The first was not mortgaging the house to have more capacity to throw at the deluge of in-the-money offers.

The second was not using that capital to retain the profit on each deal as a long term hold by only selling enough to get your money back rather than dumping all but 10 shares, which was the low risk strategy adopted. Just on Bluescope alone, if the $47,800 profit had been retained as 30,838 shares bought for $1.55, today they would be worth $508,838 based on Friday’s close of $16.50. We’ve all got stories about the one that got away, but starting with 10 Bluescope shares, this was pretty remarkable. Stocks were so beaten up and investors so scared that easy gains were being left on the table by a clear majority of retail shareholders in most of these offers who simply declined to participate.

Why we topped the world for GFC capital raisings

Australia was unique in the world for this scale and breadth of capital raising because our franking system drives high dividend payments which left our corporate balance sheets more leveraged than many other markets when the crisis hit. Throw in our unique access to capital through the huge pool of funds in compulsory super and you had a deluge of capital raising offers from all but a handful of ASX200 companies, something which did not happen in other markets.

Therefore, it’s fair to assume there wasn’t a retail shareholder anywhere in the world who received as many secondary market investment offers during the GFC as what is listed above. They were heady days and a classic example of buying diamonds in the rubble.

Transurban PAITREO will deliver more compensation to institutions

So, let’s switch from all those anything goes money making opportunities from the GFC, to Transurban which has now set a record by raising $10 billion in 5 years from 4 separate renounceable pro-rata capital raisings. Renounceable – that was a word rarely heard during the GFC deluge.

These Transurban offers have delivered no opportunities to me, but treated all shareholders fairly, particularly the last 3 deals which have been PAITREO structures offering both a bookbuild for retail at the end, plus an ability to sell your rights on market.

No other Australian issuer has done 3 PAITREOs so this presents an interesting opportunity to look at the data around participation and price.

After a Transurban-led syndicate agreed to pay $9.3 billion for 51% of the giant WestConnex project in Sydney, the company pulled off the biggest accelerated capital raising in Australian history, pocketing $3 billion in commitments in just 5 days earlier this month.

The overall Transurban PAITREO is $4.2 billion and the separate $1.2 billion retail offer closes tomorrow at 5pm.

Whilst NAB’s $5.5 billion PAITREO and CBA’s $5.1 billion raising back in 2015 were both bigger overall, Transurban has pulled off the biggest accelerated institutional component with its $3 billion because CBA’s institutional component was $2.1 billion and NAB’s $2.7 billion.

That makes the 96% take-up rate particularly impressive as under-writers UBS and Macquarie managed to extract $2.88 billion in commitments from existing Transurban institutional shareholders, with the $120 million shortfall clearing at $11.80, giving $1 per share in compensation to non-participants. Compensation payments to non-participants were few and far between during the GFC.

Transurban has incredibly loyal and supportive shareholders. Across those 4 entitlement offers in 5 years raising $10 billion, each time institutional participation has exceeded 90% although the 96% achieved with the recent monster was the highest of all.

Interestingly, this latest Transurban PAITREO will unfortunately also see non-participating retail shareholders receive less compensation than their institutional colleagues. However, that is all about market movements, not the structure of the offer. Non-participating institutions received $1 whereas the retail compensation payment is likely to be closer to 50c.

Transurban’s retail investors have also been unusually supportive over the past 4 years, with the lowest participation rate being 65% across the four deals.

In terms of explaining the outcome of the retail offer, we got a new best practice out of Transurban when they completed their last PAITREO in January as was explained in the January 29  Mayne Report edition at the time as follows:

The response was terrific at 4.15pm on Monday when Transurban informed the market that 53,800 shareholders applied for $395 million shares, comprising 72% of the $554 million worth of new shares on offer. Even better, was this statement: “Retail entitlements worth approximately $7.5 million were traded on the ASX between 15 December and 17 January in a range between 26c to $1.75. The volume weighted average price for retail entitlements traded during this period was 88 cents.”

We’ve never had detail like that before from an issuer. What it tells you is that 8.52 million retail rights were traded, representing 17.53% of the 48.6 million new shares offered to Transurban’s 100,000 retail shareholders.

I own 7 Transurban shares and therefore have the option of spending $21.60 taking up the 2 new shares on offer, or sitting back and waiting for the shortfall auction which will take place on Thursday. Who can be bothered doing a Bpay for $21.60 so I’ll sit back and wait for a likely $1 in compensation for the 2 rights funded through the institutional bookbuild.

Who will participate in Transurban’s retail bookbuild?

“Sophisticated” retail investors aren’t very well serviced in the Australian capital raising system. Every two years, they have to get a form signed by a CPA certifying that they have net assets of $2.5 million beyond the family home or annual income exceeding $250,000.

However, there is no central body which maintains these forms and warrants to all brokers that the individual is fit to play in the wholesale capital markets sand pit.

For instance, just how many “sophisticated” retail investors will actually be invited to participate in this week’s Transurban book build, which will take place on Thursday.

Presumably the under-writers Macquarie and UBS will allow some of their wealthy retail clients to have a go, but I doubt it will be well marketed.

Unlike institutional shortfall bookbuilds, which tend to be smaller and happen more quickly, Transurban, UBS and Macquarie have known since this announcement on August 31 that the retail bookbuild will take place on September 20.

The retail offer is worth $1.2 billion and we have some Transurban history to guide us on the likely size of the shortfall.

If Transurban matches the 72% retail participation rate from the much smaller $1.9 billion PAITREO offer in January this year, this coming shortfall bookbuild on Thursday will be $336 million (28% of the $1.2 billion worth of new shares being offered at $10.80), plus the value of the premium payment which will go to non-participants.

The significant size makes the competition tension in the shortfall auction all the more important and is why every last institutional and sophisticated retail investor should be invited to participate to minimise the typical 1-3% discount to market which retail bookbuilds deliver.

I’ll be sending a copy of this Mayne Report edition to Transurban with a specific request that they ask Macquarie and UBS to maximise the amount of sophisticated retail participation in the bookbuild offer.

It would also be nice to have observer rights during Thursday’s bookbuild, to see just how hard the auction was marketed and the breadth of participation.

Seeing as they will be selling circa $400 million worth of shares surrendered by retail investors, why shouldn’t an independent observer, such as a representative from the Australian Shareholders’ Association, be invited in to watch the auction in action?

Going forward, it would be good to see under-writers such as UBS and Macquarie given a specific incentive to try and maximise the bookbuild price and therefore the compensation payment to non-participants. Under the current system, it is the last element of any capital raising and many people have already moved on to the next deal. Indeed, some institutions  know you can often pick up discounted shares off retail shareholders because the auctions are not aggressively marketed.

If we want to increase sophisticated investor participation rates, asking to see the data and observing the auction in action will put maximum pressure on. However, it’s hard to imagine Macquarie and UBS being keen to let that happen.

Three straight Transurban PAITREOs deliver inferior compensation to retail investors

As a champion of PAITREOs because of the better outcome they deliver for retail investors, it is somewhat unfortunate that Transurban is set to deliver three straight PAITREO offers where the compensation payment to non-participating retail investors will be inferior to what the institutions got.

Here is the full outcome from the first of those PAITREOs in late 2015:

$1.025 billion 1-for-18 raising at $9.60. The $738 million institutional component was 90% subscribed with the 7.7m shortfall clearing at $10.10, delivering 50c to non-participants. The $287 million retail offer had 8 days of rights trading. There was a 70% take-up rate and the shortfall of 9 million entitlements cleared at 30c. A win for the instos 50c to 30c.

And here is the full data from that second PAITREO in January this year:

$1.9 billion 3-for-37 raising at $11.40. The $1.35 billion institutional offer was 94% subscribed and the shortfall cleared at $12.50 giving $1.10 to non-participants. The $550 million retail offer was 72% subscribed with the shortfall auction comprising 13.6 million shares which delivered 50c in compensation to non-participants. Another win for the instos $1.10 to 50c.

Transurban CEO Scott Charlton will be having a smirk about that because we got into a public stoush back in 2014 when he launched a $2.34 billion renounceable entitlement offer, but it didn’t have the retail rights trading so it was an AREO rather than a PAITREO.

I was running the ASA’s policy and engagement program at the time and we were concerned that separate bookbuilds were consistently producing less compensation for retail investors, so we pitched the idea of Transurban forward selling part of the retail shortfall into the institutional bookbuild, given the likelihood of getting a higher price.

Scott Charlton wasn’t happy with the media we generated and responded with this counter-attack in The AFR which carried the headline: “ASA hurting investors’ interests, says Transurban boss”.

In the end, our forward seeling proposal was too complicated a solution because it required guesswork on the size of the retail shortfall. Besides, in that 2014 AREO, retail investors out-did their institutional brothers, receiving 46c in compensation versus 25c for the non-participating institutions, because the market rallied on the strength of the $7 billion Brisbane Motorways acquisition at the time.

From a policy point of view, ASA settled on advocating for the PAITREO as the solution, because it has the added benefit of giving retail shareholders multiple days of trading to time their exit on market, and a better price at the end because the size of the retail bookbuilds have been reduced by the on-market rights trading.

However, this is where we currently sit with the latest Transurban PAITREO where retail investors will once again almost certainly receive an inferior outcome:

$4.2 billion 10-for-57 PAITREO at $10.80 with the stock trading at $12.06 before it was launched. There was also a $600m placement at $10.85. The $3 billion institutional offer was 96% subscribed with the $120 million shortfall clearing at a $1 premium of $11.80. The $1.2 billion retail offer had rights trading from September 5 until September 11 and never traded above the $1 compensation which instos received. With the stock closing at $11.24 on Friday, investors will be doing well to get 40c in compensation from Thursday’s bookbuild.

Tracking the breakdown of who owns Transurban

One of the interesting features of pro-rata entitlement offers with separate institutional and retail components is that it provides an accurate snapshot of the collective ownership between the two classes of shareholder.

So, let’s have a look at how it broke down across all 4 Transurban capital raisings since 2014:

In 2014, the retail offer comprised 23.8% of the overall raising - $557 million of $2.34 billion. Even though there was no rights trading (it was an AREO not a PAITREO), the retail participation rate was still an impressive 65.4% of the available stock.

There must have been a few retail brokers recommending Transurban after its 2014 Brisbane Motorways acquisition because by the time we got to the $1.025 billion PAITREO in 2015, the retail component was up to 28% - $287 million out of $1.025 billion. The $738 million institutional component was 90% subscribed and retail participation wasn’t far behind at an impressive 70%, a result enhanced by the rights trading that comes with the PAITREO structure.

When the January 2018 PAITREO was launched, this had climbed again as retail investors were entitled to 28.9% of the offer - $550 million out of $1.9 billion. Thanks to rights trading, the retail take-up rate was an even more impressive 72%, but the 28% shortfall then largely went across to institutional shareholders.

This current offer has slipped slightly with retail comprising 28.57% of the total - $1.2 billion out of $4.2 billion, although the separate $600 million institutional placement will exacerbate the overall retail dilution.

Can this latest PAITREO crack a 70% retail participation rate? I doubt it given the size, the amount of times Transurban has been back to the well and the weakness in the market during the offer period, but we’ll know for sure later this week.

That’s all for now.

Thanks for reading and keep doin’ ya best, Stephen Mayne