Underwriting laws are clearly over-written

Monument Oil & Gas won plaudits for the cost-saving structure of its £96m rights issue last April. But FD Liz Airey has written to the Monopolies & Mergers Commission – which is currently investigating City underwriting practices – to say that tax rules denied the company the opportunity to save even more.

In the deal, existing major shareholders agreed to take up their own slice of Monument’s issue and underwrite the balance. Their underwriting fee was set at 0.625% of the value of the issue, after a tendering process to reduce costs even further. Normal City practice is for the merchant bank to be paid an underwriting fee of 0.5%, while a stockbroking firm earns 0.25% as it places the sub-underwriting with City investors, who get 1.25%. There are additional fees if the underwriting period is longer than normal.

But though Monument saved £1.3m in underwriting fees, the question remains: why didn’t the company opt for a deep-discount rights issue, which could have eliminated the need for any underwriting?

Airey told Financial Director that the problem was the extent of the company’s employee share ownership, coupled with the relatively “heavy” one-for-four issue: the nil-paids would have been worth a lot of money and, for private investors, they would have fallen foul of the capital gains tax rules. Employees selling nil-paids to raise cash to take up their remaining rights would have incurred CGT, reducing the proceeds available for reinvestment.

“I wrote to the MMC saying that that was the primary reason we chose to underwrite,” Airey said.

She added that some companies get “squeamish” about the need to adjust dividend pay-outs after a deep-discounted issue: “I don’t know why,” she said. “It strikes me as pure arithmetic.”

See FD Interview, p 18.