Equity Markets and Alternative Investments Teaching Program 2017-2018 Week 3 – September 26, 2017 Straight Equity Follow-ons: Rights Issues, Accelerated Bookbuildings, Fully Marketed Offerings

Marco Morelli - Chief Executive Officer – Banca Monte dei Paschi di Siena SpA - Italy Gianluca Iuliano Selling Shares After the IPO

Overview of Main Types of Follow-on Equity Offerings for Listed Companies

Description Documentation Offering Period Primary/Secondary Discount 1 . Offer of new shares, privileging existing Usually deeply Rights Issue Prospectus c. 3 weeks Primary shareholders pro discounted

rata to their Today’sfocus existing position

2

. Accelerated sale of shares through a Typically a few Accelerated Press-release 1-2 days Primary/Secondary Bookbuilding bookbuilding percentage points mechanism

. Documented offer Usually small Fully Marketed of shares through a discount to prevailing Prospectus c. 1-2 weeks Primary/Secondary Offer bookbuilding market price at end mechanism of bookbuilding

1 1 Rights Issues Overview

Jurisdictions around Europe have different rules/timetables for rights issues, but generally similar mechanics apply

. Offer of shares to existing shareholders pro-rata to their existing holding What? . On average used to raise 40-60% pre-money market capitalization

. New shares offered at a discount vs. market price . Existing shareholders receive pre-emptive rights, allowing them to subscribe pro-rata the new shares during the subscription How? period . Rights trade in the market during the subscription period

. Most common use of proceeds are: . Repay debt Why? . Fund working capital . Restructure the balance sheet / enhance rating . Fund growth plans (M&A, capex etc.)

. Rights Issues are very common among European companies, almost unknown in North America Who? . In recent years, activity has been dominated by banks’ recapitalisations; M&A-related rights offering becoming increasingly frequent

2 Mechanics of a Rights Issue

Underwriters and issuer agree on a subscription price at which the new shares will be sold to existing shareholders

Pricing of Rights Issues – Key Factors

General market Use of proceeds Volatility of share conditions price

Absolute & relative Market views on the size of rights issue stock/sector

Top shareholders’ commitments Any new information Issuer’s shareholder included in prospectus register

Price / discount is irrelevant to the issuer and to existing shareholder, but relevant for the underwriters 3 The Theoretical Ex-Rights Price

The Theoretical Ex Rights Price (“TERP”) The TERP Discount

Theoretical price at which the shares should trade, once the The discount to TERP represents the difference in % between the rights are detached subscription price and the TERP

 A weighted average of the old share price and the subscription . Discount used to mitigate the risk of an price for the new shares excessive stock price fall during the offer period Rationale for (Current Shares Outstanding * Current Share Price) + a Discount . As long as rights have a positive value (i.e. that (Newly Issued Shares * Subscription Price) the stock doesn’t trade below subscription TERP = price), the market has an economic incentive (Current Shares Outstanding + Newly Issued Shares) to subscribe

. From a portfolio point of view, the level of Theoretical Value of discount is theoretically irrelevant, as this is a Detached Rights ‘zero-sum game’ to existing shareholders

Discount Discount to TERP Neutrality Share Price Pre - Rights Issue = Rights Value + TERP

. Discount impacts value of shares vs. value of Current Share TERP Subscription rights; but the sum is not affected Price Price

4 Shareholder Options

1 . Shareholders can exercise their rights and purchase the new shares they are entitled to

Exercise Rights . Disbursement proportional to the offer size, % interest in the company to remain unchanged

2 . Rights are listed and trade actively and independently in the market during the rights’ trading period

Sell Rights . Shareholders can decide to sell their rights in the market at their prevailing price, suffering dilution of their % interest

3 . Shareholders can sell the portion of their rights needed to exactly fund the subscription of the rest (cash neutral strategy) . Strategy minimizing dilution, maintaining the “Euro” investment unchanged “Tail-Swallow” . Percentage of dilution not impacted by TERP discount

4 . Irrational economic behaviour, sometimes due to lack of information / slow decision making process . In absence of any indication, depositary brokers often sell unexercised rights towards the end of the offer on behalf of the Do Nothing shareholders

At the end of the offer, any new shares left unsubscribed are typically auctioned to the market or eventually taken-up by underwriters 5 No Value Destruction for Shareholders

A Numerical Example Options Available to Shareholder Investor X Investor X Investor X Status Quo 1 Subscribes 2 Sell Rights 3 Tail-Swallows

Initial Share Price (€) 10.00 Share Subscribed (m) 25 - 8 Shares O/S (m) 2,000 Rights Sold (m) - 25 17 Market Cap (€m) 20,000 Cost of Subscription (€m) (125) - (42) Cash In from Rights Sold (€m) - 63 42 New Shares Issued (m) 2,000 Issue Price (€) 5.00 Final No. Of Shares Held (m) 50 25 33 Capital Increase Amount (€m) 10,000 Value of Final No. Of Shares Held (€m) 375 188 250 TERP (€) 7.50 Final % of Capital 1.25% 0.63% 0.83% Value of Right (€m) 2.50 Cash Investment (€m) (125) 63 - Discount to TERP (%) 33.3% Total Value of Portfolio Net of Cash Investment (€m) 250 250 250

Investor X Initial Shareholding

Position in Shares (m) 25 Value of Position (€m) 250 % of Capital (%) 1.25% Rights issue discount does not create or destroy any value for the issuer or its shareholders Value of Ex-Right Shares (€m) 188 Value of Rights (€m) 63 New Shares X is Entitled to (m) 25

6 Rights Issue Arbitrage

Rights and Shares Trading Pattern Example of Arbitrage Opportunity

 Rights and shares typically trade at the same time for 1-2 weeks  If rights trade cheap vs. their theoretical value an opportunistic investor could:  Normally, rights representing a “levered” way to play the shares 1 Short-sell shares in the market  If discrepancies in valuation materialise, arbitrage opportunities arise

€ 2 Use proceeds to buy rights and exercise them 10

+12% 8 3 Deliver the shares obtained, closing the short position

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4 Retain the difference, i.e. a “free lunch” 4 +36%

2  In standard and liquid rights issues (with availability of stock borrow) arbitrage opportunities occur, but tend to be limited 0 Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8 Day 9 Day 10

Share Price Implied Value of Rights

7 Role of Investment Banks in Rights Issues

Manage execution process and lead pricing discussions Joint Global Coordinators Typically take 50-60% of the economics Take the bulk of Deal Syndicate risk / fees Involved in process and pricing discussions Joint Bookrunners Take c. 20-30% of the economics

Junior layers considered for relationship purposes Co-Lead Managers Lower underwriting quota and fees

Often hedge funds Sub-Underwriters Not officially part of the banking syndicate (do not face the issuer)

The Underwriting Process

. Rights issues are typically underwritten at subscription price when terms are set . Banks guarantee to buy any shares offered to shareholders but declined by them and not sold into the market Underwriting . Economics of underwriting arrangements involve the assumption of risk and transaction management by the underwriter(s) against payment of fees by the issuer

. When issuers announce capital increases a few months ahead of the start of the offer, banks usually provide stand-by underwriting Stand-by agreements to ensure the issuer will be able to raise the announced proceeds Underwriting . These agreements are normally not based on a firm price, but only on volume

. Banks might decide to decrease their underwriting exposure shifting part of their risk to other banks or institutional investors Sub-Underwriting . Syndicate members typically profiting from different fee levels

8 Indicative Rights Issue Timetable

Timetable Largely Varies Depending on Jurisdiction and Requirement of EGM Approval or Not

Optional – Only if EGM is Required

BoD Approves Announcement EGM Final Rights Take-Up of Rights Issue Issue Terms Closing and Settlement Prospectus Approval

c. 1 month 3-4 weeks Up to 1 week

Subscription Period

General meeting Rights Trading Period notice period Any remaining share is taken-up by the Offering Begins underwriting banks

Prospectus Publication Rump Placement Shares go Ex Right

Underwriting Period

9 Key Advantages of Rights Issues

 Friendly structure to shareholders  Well-known by investors, especially in Europe  Certainty of proceeds to issuer  Greatest size capacity even in difficult market conditions  Structure allowing for time dedicated to marketing (roadshow, etc.)

10 2 Accelerated Bookbuildings Overview

Accelerated offerings typically occur overnight, with no marketing and limited documentation

. An accelerated bookbuilding (“ABB”) is a placement executed over a few hours, generally at a small discount to the prevailing market price . The offering may be backstopped by a bank or executed on a best effort basis What? . In a backstopped ABB, the bank guarantees a minimum price to the seller/issuer . ABBs are generally undocumented transactions, meaning that they do not require an offering memorandum . Accelerated trades have dominated European ECM issuance lately, with c.30%+ market share YTD

. ABBs are usually launched post market close . Pricing and allocations are released ahead of market open on the following day How? . A book of demand is built by investors specifying price and size (generally within an indicated range) and this can be completed within a matter of hours

. ABBs can be primary or secondary transactions: Why? . In primary ABBs, new shares are sold by the company to new and existing shareholders . In secondary ABBs, existing shareholders monetize some or all of their holding

. ABBs are used globally Who? . More often secondary than primary; common by Sponsors after an IPO

11 Illustrative Offer Timeline

Overnight Timetable – Example of a Competitive Process Day 1 Day 2

15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 06:00 07:00 08:00 09:00 10:00 11:00 12:00 13:00

NDA received Communicate Transaction Bookbuilding Allocations NDA Launched Signed Bookbuilding Bookbuilding RfP Update Call Bookbuilding Update Call Received Update Call Bid Books closed Submitted Transaction Priced

Offer Can Be De-Risked Through a Targeted Comprehensive Pre-Sounding Exercise

. Compliance-approved process to take a limited number of institutional buy-side clients “over the wall” . Calls placed by senior ECM professionals to a selected group of institutions (10 to 15 max) following a detailed script on a taped line . Appetite is tested and potential indications of size and price are gathered on the same phone call

 The practice offers a much higher degree of comfort on the achievable size and price, generally maintaining flexibility for the seller to walk away without disclosing the tested offer in case of an unsatisfactory estimated clearing level

12 The Bookbuilding Process Practical Example for a €150m ABB

Total Demand €446m €433m €297m €137m €134m Subscription Level 2.97x 2.89x 1.98x 0.91x 0.89x

Demand at Different Prices (€m)

Investor Limit (€) €12.00 €12.25 €12.50 €12.75 €13.00

BlackRock 3m shares at €12.25 Blackrock 12.25 36.00 36.75

Capital World 10% of the deal at strike Capital World 13.00 15.00 15.00 15.00 15.00 15.00

Fidelity €10m at €12.50 Fidelity 12.50 10.00 10.00 10.00

Kairos €10m at €12.25 and €5m at €12.75 Kairos 12.25,12.75 10.00 10.00 5.00 5.00

GLG €50m at €12.50 GLG 12.50 50.00 50.00 50.00

Och Ziff 10m shares at €12.25 Och Ziff 12.25 96.00 98.00

Citadel €20m at bottom Citadel 12.00 20.00

Generali 7m shares at €12.50 Generali 12.50 84.00 85.75 87.50

JPM AM 6m shares at strike JPM AM 13.00 72.00 73.50 75.00 76.50 78.00

Samlyn €15m at €12.50 Samlyn 12.50 15.00 15.00 15.00

Soroban €2m at strike Soroban 13.00 2.00 2.00 2.00 2.00 2.00

Threadneedle 3m shares at top Threadneedle 13.00 36.00 36.75 37.50 38.25 39.00

Pricing ABBs is not a mechanical exercise, but will depend on multiple factors like quality of the book, market conditions etc.

13 Key Advantages of ABBs

 Speed and flexibility, minimizing market risk for the seller/issuer  Very limited documentation requirements  Opportunity to target new investor base and strict control over allocations  Attractive pricing terms achievable for seller/issuer  No need to involve underlying company in sell-downs

14 Appendix Unicredit Prices Rights Issue at 38 Percent Discount

UniCredit priced its 13 billion-euro rights issue at a 38 percent discount on Wednesday as it prepared to launch Italy’s biggest ever share sale in a move to rebuild its balance sheet. Sources told Reuters last month the lender was expected to offer the shares at a discount of between 30 and 40 percent.

UniCredit, Italy’s only globally systemically important bank, is selling new shares to offset bad-loan writedowns and other losses and shore up capital to allow it to boost profits and dividends. Italy’s biggest bank by assets said it had priced its rights issue at 8.09 euros per share, offering 13 new shares for every 5 shares owned. That implied a discount of around 38 percent to the so-called theoretical ex-rights price.

The offer, underwritten by a banking syndicate that will mop up unsubscribed shares, will kick off on Monday and close before March 10, it said. UniCredit, led by French banker Jean-Pierre Mustier, unveiled its bumper rights issue last December in a plan that also included job cuts, asset sales and the disposal of 17.7 billion euros in bad loans.

The lender said its plan to speed up the reduction of its non-performing loan portfolio through a sale into vehicles managed by Pimco and Fortress was moving into execution phase, which would conclude this year. UniCredit also confirmed targets contained in its 2016-2019 strategic plan, including a fully-loaded Common Equity Tier 1 ratio - a key measure of financial strength - of more than 12.5 percent in 2019.

The lender said earlier this week it would fall short of European Central Bank capital requirements in 2016 but added the deficit would be fully restored after the rights issue. It also said it expected to book a net loss for 2016 of around 11.8 billion euros due to one-off charges.

Reuters, 1 February 2017

15 Dutch State Raises $1.68 Billion Selling 7% Stake in ABN Amro

The Dutch state raised about 1.48 billion euros from selling an additional 7 % stake in ABN Amro Group NV, taking advantage of steady demand for European bank stocks as it progresses toward full privatization.

The government sold 65 million shares for EUR 22.75 apiece in an accelerated bookbuild, reducing its holding to 63 percent, NLFI, which manages the state’s financial investments, said Wednesday. The remaining shares in ABN Amro are subject to a lock-up period of 60 days following the settlement, NLFI said.

The offering adds to some $44 billion of European bank shares sold or scheduled to be placed this year amid optimism about growth in the euro region. Wind-downs of several troubled lenders in Spain and Italy this year have also failed to dent confidence. Spanish Economy Minister Luis de Guindos said Tuesday that his country plans to sell further stakes in Bankia SA if there’s demand, after the state-owned lender agreed to take over Banco Mare Nostrum SA.

ABN Amro, once one of the world’s biggest banks, has refocused its business on domestic lending in the wake of its near collapse during the financial crisis. It returned as a publicly traded company in November 2015 when the government sold a 23 percent stake in an initial offering. The Dutch state plans to gradually sell down its holding. ABN Amro has rallied about 10 percent this year, compared with a 6.8 percent gain in the 37-member Bloomberg Europe 500 Banks and Financial Services Index. The shares closed Wednesday at 23.24 euros.

[…] Margins are under pressure on loans due to low interest rates from the European Central Bank, though a lending push helped drive profit. Net interest income, the bank’s main source of revenue, rose 3 percent to 1.6 billion euros. Total loans rose by 4.5 billion euros in the first quarter compared with the final three months of 2017, driven by corporate lending and residential mortgages.

Other banks that sold shares this year include Deutsche Bank AG, Credit Suisse Group AG and UniCredit SpA, which raised a combined 25 billion euros. Banco Santander SA sought another 7 billion euros when it announced the acquisition of struggling rival Banco Popular SA this month.

Bloomberg, 28 June 2017

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