After being starved of primary issuance volumes this year, investors are hoping for an equity raise feast.

On May 23, National Grid [LON:NG] announced its intention to carry out a c.GBP 7bn rights issue, with new shares sold at GBP 6.45 apiece, a 34.7% discount to the theoretical ex-rights price of GBP 9.88 per share. Barclays and JPMorgan are underwriting the 7-for-24 share issue.

The raise will help the utility company fund capital investment of around GBP 60bn over the next five years, nearly double the previous five years, to deliver “a significant step-change in critical energy infrastructure in the UK and US in support of the energy transition and economic growth objectives.”

The announcement was a surprise to the market with little public speculation around National Grid’s cash call prospects.

An investor looking at the deal called it “a very impressive transaction”, praising both the banks and the company for being able to prep such a large cash call discreetly.

The lack of pre-deal talk meant there were no significant shorts in the stock prior to the announcement and the stock had been up over 6% year to date.

National Grid had to tread a fine line between getting its shareholders comfortable with its capex plans in regular meetings over the last few weeks, without alerting them to a possible equity raise, said a source close to the deal.

Banks then conducted a wall-cross exercise with National Grid’s major shareholders prior to the announcement, according to the source. The company’s largest shareholders, as of 1 February, were Vanguard, BlackRock, Capital Group, Legal & General, Lazard Asset Management, Fidelity, Abu Dhabi Investment Authority, and Norges, according to Dealogic’s UK holdings data.

Some shareholders expected the need for an equity raise to fund plans, said a second source close to the deal, but they did not know the size or any firm details of the potential cap hike. This meant that when they were approached for a wall-crossing, they were prepared, the source added.

Peers Drax [LON:DRX], Pennon [LON:PNN] United Utilities [LON: UU] and Severn Trent [LON] all experienced high single-digit percentage falls in their share price on the announcement of the National Grid rights issue, fueled by speculation that they too might need to raise capital in the face of energy transition and other costs.

“When you look at the trading of the sector as a whole since the announcement, it shows the benefits of being at the front of the queue,” said the source.

Results will be announced on June 12, with any remaining shares to be sold in a rump placement.

Doing it right

The National Grid deal breathes some life into a European rights issue market sorely in need of resurrection.

Despite global benchmarks being close to records and interest rates still stubbornly high, 20204 has been the worst year in a decade not just for rights issues, but also for European primary raises as a category, according to Dealogic data, with only USD 2.3bn of rights issue volume across European exchanges.

“Sometimes you have the perfect conditions for these deals, and you just wonder why they aren’t coming, but it feels like deals are now about to come,” said a second investor.

Source: Dealogic

A third investor was also befuddled by the lack of rights issues so far this year, saying that conditions seemed almost perfect.

There are still a few deals in the pipeline. French rail giant Alstom [EPA:ALO] launched a EUR 1bn rights issue on 27 May, while French nursing home operator Clariane [EPA:CLARI] is lining up a EUR 300m raise.

The UK’s Great Portland Estates (GPE) [LON:GPE] also joined the party last week. GPE hit the market on May 23 with a fully underwritten GBP 350m rights issue to take advantage of the attractive acquisition and development opportunities emerging in central London commercial real estate, it said.

Despite the uptick, bankers are still struggling to get clients to agree to rights issues, particularly for balance sheet repair, even if they suspect they might need them.

“I still don’t think the environment is right for rescue rights issues,” said an ECM banker, adding that without an outside trigger, companies are wary of opening the door to possible management criticism. “As long as you can avoid it you will try to go along without it,” the banker added.

In Europe, particularly, the rights issue product remains associated with corporate trouble and hugely dilutive rescue raises, said a second banker, causing some management teams to become “allergic” to rights issues unless they are deemed vital to the future of the company.

Exposure to long-term market volatility and short attacks are regularly cited by clients as a reason not to engage on rights issue discussions, bankers say.

According to data from Breakout Point, which tracks disclosed European short positions, around 4.15% of Alstom’s share capital was being held as part of a short trade. But disclosed shorts were at almost 6% earlier this year before Alstom confirmed its plan to raise around EUR 1bn in a share sale. The company’s stock has risen over 13% since the announcement of the deal.

Atos SE [EPA:ATO] had been preparing for a rights issue but had to cancel the deal in February due to adverse market conditions; its shares have fallen over 47% since the cancellation of a cash call.

National Grid shows that a proactive approach to an equity raise, before the market thinks you need one, can put companies on a stronger foot. Shareholders must be comfortable with some technical shorting during the rights process, said the source close to National Grid’s deal, adding that this sort of activity can be helpful as funds generally try to buy the rights to close their position.

While most rights issues are rarely fun, waiting too long to pull a rights issue trigger can be the end of the party.

National Grid declined to comment.