Rumblings from Enbridge’s $2 billion equity financing – an offer that’s likely to be upsized by 15 per cent and that closes Tuesday – continue.
One rumbling concerns the way in which the stock was allocated. With a cast of 17 firms, four more dealers were involved this time around in contrast to the business’s previous equity offering, a $460 million issue in mid-2014.
But there was no room for any selling group firms. Those firms, which don’t carry any of the risk that’s assumed by the underwriting group, put orders in on behalf of their customers (normally retail) hoping of having a so-called fill.
On this financing – announced at 4:42 p.m. last Wednesday C potential selling group firms received a phrase sheet at about 4:51 p.m. Three and a half hours later – an incredibly short period of time to sell such a great deal of stock – the same firms received an email from syndication “that the financing has already been closed and there’s no selling group allocation.”
Related
- Enbridge set to boost $2 billion of equity which will meet its needs ’till the end of 2017Explanations, most of which are fanciful, behind Enbridge’s stock price gains
-
-
-
Instead all the available stock was placed by the firms in the syndicate: allocations ranged from 16 per cent for RBC and Credit Suisse to 0.5 percent for each of First Energy, Macquarie Capital Markets and Peters & Co.
“You put a purchase in for shares on behalf of a client and you’re simply told that you get nothing. It’s deflating,” noted one broker. “Get the same result a few times in a row and you start losing clients,” he added noting that although not having a selling group may go in the short term, it’s not constructive from the long-term perspective.
The argument runs this way: on the cycle issuers need both small and big dealers to meet their needs. But to ensure that the little dealers are around when the big dealers decide they won’t be covering that segment from the market, they need to get part of the discounted prices. (A few years back, in another blow, the federal government of Ontario did away with selling group participation for its bond offerings.)
And Enbridge would be a good deal: the orders piled in (more than 200 institutions participated); demand was strong as continues to be the after market performance: the shares are up by more that $6 from issue price. It would happen to be easy money for the smaller firms – though because it’s a classic zero-sum game, their revenue might have come in the cost of the underwriters.
This broker contrasted the Enbridge knowledge about what went down using the privatization of Hydro One where the seller (Ontario government) insisted on broad retail participation – an objective that was partly achieved by together with a group of selling group members. That edict was simple to apply because the offering was marketed – and not bought, where self interest necessitates shares be sold as quickly as possible.
Who gets what in a deal is really a multi-part process. The overall allocation between firms – meaning the underwriting liability each dealer agrees to – is set through the issuer with input from the lead managers or book-runners. Enbridge’s policy is: “We look after those who take care of us.”
With input from the issuer, the split between institutional and retail is then determined, a determination that could change once all of the orders have been received. In an over-subscribed deal, the final allocation, which institutions get stock could be tense.
bcritchley@nationalpost.com
