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“There is opacity around what fees are actually paid, to whom and for what.” This is one of the conclusions of a new report about rights issues in the UK by a group of institutional investors. The group, known as the Institutional Investor Council, bemoans the fees paid by companies to raise equity capital.

Underwriting fees should be expected to rise during times of stress, given the greater risk that underwriters expose themselves to when managing issues in choppy markets. However, the investor council claims that the average gross underwriting fee since 2007, 3.4%, is unjustifiably higher than the 2.0% average recorded throughout the 1990s. It cites a lack of transparency and limited competition as key factors contributing to the situation. It also notes the common perception among clients of banks and other professional advisors that low fees are a sign of low quality. It then provides this unflattering anecdote:

We were told that extreme pressure could be brought on issuers to pay additional costs, the need for which appeared to come to light only once the process had started. Indeed, one sought to protect itself at the outset from these risks by paying an additional fee dependent on ‘not being held to ransom’ after the process had started.

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On its face the deal is not particularly appealing, but it has still emerged as the world’s biggest share offering of all time. Petrobras, Brazil’s oil giant, has located lots of oil and gas, but the reserves are hundreds of kilometres offshore and several kilometres under the ocean and a thick cap of geological salt. The company needs hundreds of billions of dollars in investment funds and will run cash shortfalls for years. Worst of all, the government insists on keeping a controlling stake and is not even paying cash for its shares.

Nevertheless, the positive aspects of the deal have won out, for now, as Petrobras priced a giant rights issue on September 23rd.

Read more at Financial Services Briefing: “Petrobras engineers a gusher” (September 24th)

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