Banks likely to sell more shares at a discount
Written on April 15, 2008
Raising capital is getting harder for banks as they tap the well more and more and over time more banks could find themselves selling shares at a discount.
That means the stocks of financial companies could get hit twice — by the deteriorating performance of the company’s business and the potential for onerous capital raising.
Case in point: Wachovia Corp (WB.N: Quote, Profile, Research), which raised $7 billion of capital on Monday. Half of that comprised shares that it sold at a discount to Friday’s closing price.
The other half of the offering was a convertible preferred share offering with a coupon of 7.5 percent. Add the value of the conversion option and Wachovia is paying at least a few percentage points extra a year compared with preferred shares it sold in February. Plus the convertible securities will reduce diluted earnings per share.
This is the second time Wachovia has had to raise capital this year and many other banks have gone to the well multiple times.
Washington Mutual Inc (WM.N: Quote, Profile, Research) investors fared even worse when it sold $7 billion of securities last week, including $1.54 billion of shares sold at a price about a third below the prior day’s sale price free credit report.com. That issuance followed Washington Mutual’s sale of $3.9 billion of preferred shares late last year.
Citigroup Inc (C.N: Quote, Profile, Research) has raised over $30 billion since late last year in multiple capital raises.
Citi has raised money mainly from sovereign wealth funds and private investors and, to a lesser extent, public markets. Washington Mutual raised its money earlier this month from investors, including private equity firm TPG Inc.
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