My Switzer Daily colleague, Andrew Main, was spot on yesterday when he warned that a successful prosecution of the bank executives in the ANZ cartel case would have a material impact on Australia’s capital markets and the ability of companies to raise capital quickly. Further, it could also have a huge impact on the reputations of two of the world’s leading investment banks - Deutsche and Citi.
With so much at stake, in such untested waters, I think this case, with appeals, could drag on for years. And that’s assuming that the Commonwealth Director of Prosecutions (acting on behalf of the ACCC) can get it to trial in the first place, which could still be a very big if.
If you haven’t caught up with the cartel allegations, here is the background to the criminal charges that have been laid against the three banks (ANZ, Citi and Deutsche) and six current or former bank executives.
In late 2014, David Murray handed his Financial System Inquiry report to then Treasurer Joe Hockey. One of the key recommendations was that Australia’s major banks needed to be “unquestionably strong” in terms of capital and balance sheet strength. With input from the regulator APRA, in particular around risk weights for mortgages, this played out in 2015 with each of the major banks raising capital through an issue of ordinary shares.
NAB was the first to go in late May raising $5.5bn. ANZ and CBA followed in August 2015, with Westpac completing the quadrella by raising $3.5bn in October 15.
The criminal charges relate to ANZ’s raising of $3.0bn in August 2015. On the morning of Thursday 6 August, ANZ shares were placed into a trading halt. ANZ announced to the market an institutional placement of $2.5bn and a share purchase plan for retail shareholders to raise $0.5bn for a total raising of $3.0bn.
The institutional placement of $2.5bn was fully underwritten by Citi, Deutsche and J.P. Morgan. It was pitched as an “accelerated book-build” with the final price to be determined by institutional bidders but not lower than the underwritten floor price of $30.95.
ANZ shares had closed trading the day before (Wed 5 August) at $32.58, meaning that the shares were being offered to institutions at a maximum discount of 5.0%.
On the Friday (7th August), ANZ announced to the market that it had successfully completed the $2.5bn institutional placement by issuing 80.8m ANZ shares at $30.95, the underwritten floor price. ANZ shares resumed trading, opening at $29.99 (almost a $1.00 below the raising price), before trading between a low of $29.80 and a high of $30.64 to close the week at $30.14.
ANZ made no mention in its statement that institutions had only successfully bid for 55.3m shares and that the underwriters were left holding 25.5m shares (worth around $790m). Not directly related to the cartel charges, ASIC is currently investigating whether ANZ should have disclosed this to the market.
With an exposure of almost $800m to ANZ, the underwriters acted to reduce this by selling the shares on market over the next few days. This is where the accusations of cartel behaviour come into play, in that the underwriters joined forces to sell the shares and colluded or co-operated in breach of the law. While we won’t know the full details of their alleged cartel behaviour until the case makes it way to the courts, we can be pretty sure about the motive. The underwriters wanted to minimise their losses, as they were on the hook to buy these ANZ shares at $30.95 and wanted to sell them at the best possible price.
Was anyone hurt by the underwriters alleged actions? Possibly, because they may have paid more for ANZ shares on market than they would have had the behaviour not happened. But possibly not, because the shares were already trading below the institutional issue price.
As Andrew Main pointed out yesterday, the market already knew that the placement was a “failure” (meaning weak demand and a possible shortfall for the underwriter) because the shares hadn’t been placed a price higher than the floor. That’s why ANZ commenced trading at $29.99 the next day and I can say surmise that possibly, no one was hurt by the cartel behaviour.
While the ACCC isn’t required to prove that a “loss” occurred in order to prove its case, to help maintain perspective on this matter, if the net result of the cartel’s alleged actions was to improve the price by $1.00 a share, we are talking about a potential loss to other investors of $25.5m. Big, but not huge.
The huge loss will be to the reputation of the investment banks and if criminal charges stick, the bankers caught out. It will also impact how companies raise capital and the whole underwriting process, where investment banks join forces to share the spoils and the risks.
With this in mind, I think that this case is going to be hard fought and could potentially drag on for years. My two bob’s worth is that it is more likely to end in tears for the ACCC.
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