Defaulting Issuing Houses mar firm underwriting of public offerings

By Peter Egwuatu
Worried by defaulting Issuing Houses to meet the regulatory requirement of mandatory firm underwriting of public offers in the Nigerian Capital market, the Securities and Exchange Commission is relaxing the rules and is replacing it with discretionary underwriting.

As a result, the Securities and Exchange Commission (SEC) has adopted the recommendations of the Dotun Sulaiman-led Committee on the Review of Capital Market Structure and Processes, which abolished mandatory underwriting of public offers

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and replaced it with Book-Building or discretionary underwriting.

Vanguard reliably gathered that the amendment was occasioned by non_compliance with the 80 per cent mandatory underwriting rules by Issuing Houses. Before now, the compulsory underwriting rule states that issuing houses are to underwrite offers by 80 per cent .

It was gathered that most Issuing Houses were not meeting their obligation to companies that were in the market to raise funds as some of them could not deposit the 80 per cent of the value of most offers they had agreed to underwrite. Issuing Houses under firm underwriting are supposed to give the money underwritten to the issuers even before the commencement of such offer.

But in most cases, the Issuing Houses did  not meet this obligation by giving the issuer the money before the commencement of the offer. Hence, the Commission has decided to discontinue mandatory underwriting.

It would be recalled that African Petroleum Plc (AP) had accused Access Bank and other underwriting firms of failing to fulfil their obligations to underwrite shares issued for purchase at the Stock Exchange in August 2008.

AP had carried an advertorial on July 27, 2009 stating that the share offer was 36 per cent subscribed, leaving 64 per cent to be covered by underwriters. Of that remaining portion of the offer, only 31 per cent has so far been covered by some of the Issuing Houses, leaving 35 per cent of the shares that had been offered, under contention.

The Managing Director of AP, Mr. Tunde Falasinnu had briefed newsmen that out of the 11 banks that went into agreement with the company as Issuing Houses and Underwriters to AP’s 2008 Public Offer/Rights Issue, only six banks: Afribank Nigeria Plc, Guaranty Trust Bank Plc, United Bank for Africa Plc, Union Capital, Zenith Capital, and First City Monument Bank Plc, had met their obligations.

He said some Issuing Houses had not met their obligations to AP. These include Access Bank, Intercontinental Bank, Diamond Bank, Bank PHB (which has partly met its obligation), and Vetiva Capital. Although some of the Issuing Houses to the offer had said that all the parties that AP approached initially “agreed in principle” to underwrite a small percentage of the total amount the company was planning to issue. They said “the agreement in principle indicates that there was no formal agreement” in real terms.

According to them, “ when all the parties came together to sign to formalise the agreement, they were surprised at the new figure AP presented because the small percentage initially agreed on had been increased.

Some of the Issuing Houses noted  that all the parties refused to sign the agreement. However, they said that it later came to their  notice that some banks which were said to have paid for the underwriting went ahead, in a separate agreement, to sign the document.

In a similar development, Spring Capital Limited, a subsidiary of Spring Bank Plc also failed to meet its financial obligation to National Sports Lottery (NSL) Plc.

The Vice-Chairman, NSL, Mr. Kola Daisi confirmed to Vanguard that Spring Capital has not fulfilled its own obligation of paying N5.2 billion. The offer was underwritten by Spring Capital 100 per cent on a firm basis suggesting that it was assumed to be fully subscribed no matter its level of subscription

It would be recalled that NSL’s hybrid offering of N12.4 billion opened  from July 14, 2008 to August 20, 2008. The company offered  800 million ordinary shares of 50 kobo each at N15.50 kobo per share to willing investors.
The offer which has seven Issuing Houses was led by Strand Capital Partners Limited. The other Issuing Houses were Greenwich Trust Limited, Dominion Trust Limited, Spring Capital Markets Limited, Maven Kapital Limited, Lead Capital Limited and Skye Financial Services Limited.

Another instance of an Issuing House that could not meet its financial obligation to the issuer as at when due was BGL Securities Limited.  BGL, one of Nigeria’s leading issuing houses and brokerage firms, is said to still be smarting from the downside effect of underwriting two public offerings last year. BGL Securities was part of the underwriters of the public offering of Daar Communications and Honeywell.

Daar Communications, originally promoted by Aleogho Raymond Dokpesi, sought to raise over N8.75 billion via an offer for subscription while Daar Investment and Holding Company Limited was to realise N 4.61 billion via an offer for sale.

The N13.9 billion, which represents 100 per cent of the offer for subscription and offer for sale was underwritten on a firm basis by the joint underwriters, including BGL Limited, Skye Bank, Fidelity Bank, Wema Asset Management Limited, among others.

It is not certain how much BGL Securities provided in underwriting the Daar Communications’ February to March 2008 offer, but it was learnt that the company committed N4 billion to underwrite the Honeywell Plc December 2008 to January 2009 public offering.

It was also learnt that BGL Securities’ present state of upset is reported to be a direct consequence of its exposure to its banks from where it raised funds to underwrite the issues. In the particular case of Honeywell Plc, BGL made a commitment of N 4 billion being part of the N18.64 billion the company had approached the market for. BGL is legally bound to give it out to the company even as the fears of market pundits about the poor showing of the Honeywell offer with operators were confirmed.

It was gathered that BGL has had to embark on desperate marketing efforts to get investors, especially, those that are relatively new to the market, to transact stock or other market activities through it. This is just as the funding banks of the top flight issuing house are reported to be heckling it daily to realise its exposure to them.

Speaking on the new underwriting system, SEC spokesperson, Mr. Lanre Oloyi said the essence of introducing Book-Building is to ensure that any offering coming to the nation’s capital market is fully subscribed and not under-subscribed

Oloyi said “ The Commission wants to ensure that public offerings are fully subscribed and not under-subscribed .We want offers to be 100 per cent successful, that is why SEC has introduced new underwriting rule and as well make underwriting of pubic offering not mandatory. In this case, the issuer will decide whether to choose underwriters or not. If issuers pick underwriters, then the underwriters will be liable to the issuers.

“In the case of Book-Building, both the issuers and issuing company will do a pre_marketing job to ensure that the public will accept the offer when it is finally issued. Also, the pricing will be determined by both the issuing house and the issuer based on the pre-marketing job .”

Continuing, he said, I want to reemphasise that SEC is discontinuing  mandatory underwriting of primary offers and make it discretionary on the part of the issuer.

Besides, with the approval of the rules on Book-Building by the Commission that have now become effective, offers through Book-Building process can  be offered  100 per cent to institutional and high net worth investors. However, retail investors can participate through participating stockbrokers and Mutual Funds. Retail investors however, still have the opportunity to purchase securities both in secondary market and in fixed price offer process. Book-Building remains optional for issuers.

“ The Book-Building mode of securities issuance will solve the problems associated with under- subscription of public offers and achieve transparency in pricing and allotment of securities,” he added.

Capital market operators commended the suspension of mandatory underwriting saying it has become a big burden on companies raising fund in the market and that the Book_Building process will help return buoyancy to the market. The operators, who spoke in separate interviews with Vanguard, noted that with the reversal of the policy, companies will be encouraged to raise funds from the capital market, as they will be at liberty to decide the pattern of their offers and the type of agreement to enter into with other parties to the offer.

According to Mr. David Adonri, Managing Director, Lambeth Securities and Investment, the policy of firm underwriting is a huge burden on companies seeking to raise funds from the market, especially during this period of global financial meltdown, as no underwriter will be willing to underwrite any offer due to the numerous uncertainties.

He said, “The decision of SEC to revert to the status quo ante in underwriting — away from the recent policy of firm underwriting, back to discretionary underwriting, which is allowing the issuer choose the kind of underwriting that it prefers, is a step in the right direction. Companies should be allowed to choose whether to undertake standby or firm underwriting.

“The decision to make it firm only, appears abnormal, because the issuer, after its computations, and in line with strategies it is deploying to finance the issue, should be at liberty to decide whether to underwrite at all or do a standby underwriting or firm underwriting.

Therefore, the current policy giving discretion to the issuer, is a normal thing to do. This is especially so as we are not completely out of the current financial crisis.

“Firm underwriting is a colossal burden that no underwriter can shoulder. In which case, it is more or less a panacea for the failure of a weak offer. This is because, if there is an insistence of firm underwriting, it means no underwriter would be prepared to assume the underwriting liabilities and if the offer is weak and there is no provision for standby or a lesser level of underwriting, then the possibility of failure of such an offer is very high.

“Discretionary underwriting means that the underwriter can actually come in to lend their support to the extent of their capacity and capability, and so the possibility of success of an offer is much higher now than in the past when it was firm underwriting.”

Speaking in the same vein, Mr. Chinenyem Anyanwu, Managing Director, Dependable Securities Limited commended SEC for being proactive to the needs and development in the market, adding that firm underwriting helps in ensuring the successes of upcoming offers.

He said, “The action of SEC has shown that it is trying to be dynamic over the underwriting matter. It is difficult to come by money this time, banks are not lending money. Underwriting is like lending money.

“If it had left it on that and be static on firm underwriting, it would have discovered that nobody is willing to stick his neck out over any offer. Standby comes in first, because there is need for an underwriter, secondly because the underwriter who must put in that money is not very willing because of the situation in the market.

“It is like we are getting what the situation can give us and SEC has become dynamic over that, dancing according to the need of the moment.”

It is just as well that SEC has decided to adopt the recommendations of the Oladotun Sulaiman’s Nigeria Capital Market Reform Committee on the reversal of compulsory underwriting of public offerings.