(SINGAPORE) A recent rash of rights issues has irked existing investors because they must pay up or be diluted, but not all cash calls are bad news, analysts say.

'Generally a rights issue is not good news as it suggests that the firm needs to raise capital,' said George Koh, senior portfolio manager at HP Wealth Management Singapore.

'But in order to understand the complete picture, you have to look at why the company is doing it.'

The eight listed companies whose announced rights issues expire in the fourth quarter of the year have sought to raise a total of about $1.9 billion.

Securities Investors Association of Singapore (Sias) Research chief executive Roger Tan said companies typically pursue a cash call only when internal capital is insufficient and debt markets are closed.

Indeed, DBS Bank head of fixed income Clifford Lee said the US dollar-denominated debt market is effectively closed to most Asian companies at the moment, while the offshore renminbi and Singapore dollar markets are expensive for those with weaker balance sheets.

'The markets are very tough for smaller companies,' Mr Lee said.

Four of the seven companies that have announced rights issues are in the real estate sector - K-Reit Asia, Lippo Malls Indonesia Retail Trust, Pollux Properties and SingXpress Land.

Property developers that do a rights issue to raise working capital are usually an indicator of a toppish property market or troubled developers, said Sias Research chief executive Roger Tan.

'I think the companies are seeing potential challenges with raising new funds in the future, so if they raise now at least the chances...are higher. If the property market gets hit they may not even be able to raise funds in the capital market,' Mr Tan said.

He dismissed the possibility that the companies could be shoring up cash to build up a land bank on the cheap if the market deteriorates.

'For many of these developers, most of their money would have been in their projects, and if those do well they'll be able to plow that back into their balance sheet, and they can easily borrow even when the market is down,' Mr Tan said.

Mr Tan was more forgiving of real estate investment trusts that do a rights issue, or companies that are usually generous with dividends.

'What the company does is it pays out that money in a dividend, then it does a rights issue to say, if you like what we're going to do, you can put that money back in the company,' Mr Tan said.

Market response to the offers has generally been negative.

None of the names are currently trading above the theoretical price of the shares, which averages out the pre-announcement price of the shares and the cost of the rights shares.

One investment banker, who declined to be named because of sensitivity to existing and future business, said investors generally do not like cash calls because they are in a 'Catch 22'.

'Shareholders feel like if they don't put in more money, they'll be diluted,' the banker said.

And nervous investors wonder why the company cannot raise money elsewhere.

'When a company actually does a rights issue, the signal is not very positive,' Mr Tan said.

The analysts said the key distinction is in how the proceeds will be used.

Some companies incurred the wrath of investors by not having clear applications for the proceeds.

One capital markets consultant noted that investors of S i2i, the former Spice i2i, balked back in January when the company announced its rights issue because they felt that the use of proceeds was not clearly spelled out.

'We want the companies to have good cashflow reserves, but not too much money in their hands that they can do what they want,' Mr Tan said.

Of course, investors must also feel that the expected returns will surpass the cost of capital.

'Other reasons driving a rights issue could be due to an acquisition or expansion,' Mr Koh said. 'That being the case, we have to analyse if it makes sense.'

Using a cash call to pay off debt is usually negative, because it suggests that the company is not making enough on its own to pay off its loans, and creditors are not willing to roll over existing obligations, Mr Tan said.

Raising 'working capital' is also usually too vague to be taken well, unless the company is a merchandising business where working capital is sometimes needed to raise inventories.

Mr Koh said that in the current market environment, investors will demand better returns because risks are higher.

'Hence, I'd be more reluctant to take up the offer as the current market volatility suggests that I can afford to wait and perhaps pick up the shares later at a lower price,' he suggested

Source: Business Times