Near Term Negative Impact Of An SRO (Stock Rights Offer)

In an unexpected turn of events, Metropolitan Bank and Trust Company (MBT or Metrobank) announced that it will conduct a stock rights offer (SRO) by issuing up to a maximum of 819,827,214 common shares to raise approximately Php61 billion in fresh capital. The effect of the announcement was immediately felt by the market as MBT immediately slid by 7.76% to Php98.70 from its previous day’s close of Php107.00 on heavy volume amounting to a value turnover of Php1.56 billion. Looking how the stock closed (with an unfilled supply amounting to 1.66 million shares at its last close of Php98.70), it appears that the stock may likely continue to soften in the near term.

But firstly, why do stocks generally soften on announcement of an SRO? Well, an SRO typically requires holders to shell out money for the new shares that will be issued to them. If they choose not to subscribe to the said shares then they run the risk of having their holdings diluted (the value of their holdings will decrease because of the increase in supply). If they don’t want your holdings to be diluted, then they have no choice but to shell out more money and subscribe to the offer. While the shares to be offered are usually at a discount to market, the premise of shelling out more cash is not good to some especially for those who does not have the extra funds to do so. So to get around, the holders may opt to just to sell their position entirely. This is exactly what happened to MBT.

Just when the market was shell shocked with the sudden drop in MBT. Its peer in the Bank of the Philippine Islands (BPI) also announced after the market closed that it will likewise conduct a stock rights offer to raise Php50 billion in fresh capital. We can therefore expect BPI to gap down and drop with the same degree as to MBT as soon as the market opens tomorrow (January 18, 2018).

Last November 24, 2017, Robinsons Land Corporation (RLC) also announced that it would hold an SRO to raise Php20 billion in new funds. The news was negatively received by the market with the stock being sold down to Php21.00 from the previous day’s close of Php24.60 or a decline of 14.63%. In the case of RLC, the offer period for the sale of its new shares to holders will commence on February 2 and end on February 8, 2018. We can therefore expect an overhang (selling pressure on the stock) up until the offer period ends.

The story, however, is somewhat different the time China Banking Corporation (CHIB) and BDO Unibank, Inc. (BDO) embarked in an SRO. In the case of the former, the stock even rose by 0.72% when the company announced that it would raise Php15 billion in new funds via SRO back in March 27, 2017. Granted, the stock still declined to as low as Php32.36 from a high of Php36.69 several days after its offer period ended in May 5, 2017.

In the case of BDO, the stock only had a marginal loss of 0.36% when it announced a Php60 billion SRO back in December 16, 2016. But like CHIB, its shares also declined to as low as Php100.23 in the next several days from Php106.44. However, it is important to note that both CHIB and BDO were able to recover and even establish new 12-month highs (new all-time high in the case of BDO) in the months after each weakened following the capital raising program. Though, it is also important to note that one possible reason why they didn’t really react negatively on the announcement of the SRO was the fact that the market as represented by the index was already down a lot to around 6,800 when BDO’s SRO was announced and to around 7,200 when CHIB’s SRO was announced from a previous index high of 8,100.

Today’s case may somewhat be deemed different as the index and majority of the stocks are trading at an all-time high. One can argue that companies are already starting to take advantage of their high prices by selling shares. In the same way, the slew of capital raising program may likewise be deemed as negative as such will suck liquidity from the market (absorb funds that can otherwise be used to push the market higher). Going back to SROs, while such is generally negative to a stock in the near term, such is on the other positive for it in the mid to long run, granted of course, that the company can make use of the funds to grow their earnings.

Furthermore, while the market often reacts negatively on news of an SRO due to the reasons stated above, it is actually to the companies’ benefit to support or even ‘carry’ their stock so that they can still sell the shares that they will do so at ‘discounted’ prices relatively higher. For example, if the market price of company A has fallen to only Php100.00, if they are to offer new shares at say 10% discount, then they will have to do so by offering them at Php90.00. But if they managed to support and push the stock say to Php120.00, then a 10% discount against a market price of Php120.00 is Php108.00.

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