Sometimes companies need to raise extra cash from shareholders — to fund expansion, cover losses or pay down expensive debts.
ANZ was in that boat in mid-2015. Late in 2014, David Murray’s financial system inquiry had recommended that Australia’s banks lift their cash reserves to become unquestionably strong and able to withstand a major crisis.
It was a recommendation new APRA boss Wayne Byres embraced wholeheartedly, with the bank regulator’s own reports showing some worrying weaknesses in Australia’s big banks.
The big four responded with capital raisings, where new shares are sold to investors, generally at a discount to existing ones, to raise the extra money.
In August 2015, ANZ engaged Citi, Deutsche Bank and JP Morgan to underwrite a share sale intended to raise $2.5 billion to help the bank meet the higher capital requirements.
As is normal in these so-called share placements, the underwriters agreed to buy any shares that other investors didn’t want.
Often, there aren’t any left over. But this time almost a third of the shares didn’t sell.
That left the three big investment banks with a chunk of ANZ shares they would eventually need to offload.
The allegation that the ACCC is making is that the three investment banks and ANZ, through some of their most senior executives, came to an understanding about how these shares were to be dealt with.
However, JP Morgan has not been charged.
Given the criminal nature of these charges, the ACCC’s chairman Rod Sims has been unusually, but understandably, tight-lipped about the case.
“Charges have now been laid by the Commonwealth Director of Public Prosecutions and the matter will be determined by the court,” he said.
Citigroup and Deutsche Bank have both confirmed that they will vigorously defend the charges, as will ANZ.
With a criminal case now underway, the banks haven’t said too much either, but Citi did offer this response.
“Citi steadfastly denies the allegations made against it, and certain employees … Citi will vigorously defend these allegations on behalf of itself and its employees,” the bank noted in a statement.
“Underwriting syndicates exist to provide the capacity to assume risk and to underwrite large capital raisings, and have operated successfully in Australia in this manner for decades.
“Citi and its employees acted with integrity and without any bad intent in fulfilling the obligations of this underwriting agreement.
“As required by the Market Integrity Rules, Citi also effectively participated in orderly capital markets to ensure that the required outcomes for ANZ and its shareholders were achieved.”
So what do underwriters do and why?
With the ANZ matter before the court, it is impossible to discuss in detail the specifics of this case.
However, it has left a lot of people wondering what services underwriters perform for their clients in share sales and the how they assist the functioning of the market.
InvestSMART chief market strategist Evan Lucas said their main role is to effectively act as a guarantor the share sale will succeed, raise the money required and take on the financial risk if it’s a flop.
“Their role is two-fold — it is not only to distribute those shares in the initial offering, it’s also to be there to be a price supporter,” he said.
“If an IPO [initial public offering] or a capital raising is incredibly well bid, there needs to be an ability to therefore have some sort of price on the sell side.
“On the other side, if things unfortunately go poorly for the capital raising, as the underwriter, part of their legal obligation is to basically take on what is left behind and therefore you can see scenarios where those underwriters end up with a lot of underbid stock.
“They aren’t allowed to dump that either, again that’s part of their obligation.”
This may sound like a thankless task with a lot of downside and little upside, but the investment banks that do it collect fees for taking on the risk that there’s not enough demand for the new shares.
“Part of the whole scenario is the administration, the legal side, making sure they meet the obligations of the ASX,” Mr Lucas explained.
“They get paid the fee for actually taking on the risk and they will have a percentage, like what you get with a loan; they take from it for the risk of actually listing a company or taking on a capital raising.”
Mr Lucas said it’s a pretty common practice for major IPOs and capital raisings to be underwritten by investment banks.
“The risk is that if you had a non-underwritten IPO, where let’s say only 60 per cent of the IPO was bid up, you would therefore be short of the capital required to come online,” he said.
“You wouldn’t, therefore, be able to make a continuous price, you’d also have a scenario where you may actually see the IPO fall over because they haven’t raised the capital required to meet their obligations.”