Rights issue
What is it?
A 'rights issue' is the name given to the process by which a company issuing additional shares starts by offering the new shares to its existing investors in proportion to the number of shares its investors already own.
For example, if Mr Big Investor owns 10% of the shares in Large Bank, when Large Bank makes a rights issue worth $100m, Mr Big Investor will be given the option to purchase $10m of the new shares.
To give existing investors an incentive to purchase the newly issued shares, rights issues are usually priced substantially below the level at which a company's shares are currently trading on the market.
What's it got to do with the financial crisis?
Faced with the need to raise extra cash to maintain their capital adequacy, many large banks have opted for rights issues to try and shore up their finances.
For example, after French bank Société Générale lost €5bn following the Jérôme Kerviel scandal, it completed a €5.5bn rights issue in March 2008. British banks such as Royal Bank of Scotland, HBOS and Bradford & Bingley also launched rights issues, with varying degrees of success. Speed was a necessary factor for many of these capital-raises, because volatile markets sent stock prices swinging unpredictably. JP Morgan, for instance, raised $11.5 billion from investors in only 24 hours.
In June 2009, US banks raised nearly $9 billion after government tests encouraged them to boost capital.
Last updated on 7 September 2009.
