SocGen's rights issue will be a confidence vote by Finance News Bulletin

Published: 09/04/08

All times are London time look for News in the FTcom siteSearchSearch speech marks in the FTcom sitespeech marks In depthBreadcrumb trail navigation:FT house > In depth > Société GénéraleServicesSociété Générale may have persuaded two of the world’s leading investment banks to underwrite its €55bn ($7

98bn) rescue rights subject but the fundraising will still be a huge test of self-assurance in the French bank – and the wider banking sectorSocGen needs the money to repair the hole in its balance piece caused by unauthorised lossmaking trades by a junior dealer, Jérôme KervielThe choice of a rights subject means SocGen’s shareholders have the opportunity to prevent their holdings being diluted by the split issuanceThey have right of first refusal over the newly issued store so, by taking up the offer, they maintain their same proportional investment in the company’s enlarged equity

JPMorgan and Morgan Stanley have dedicated to buying any shares that shareholders do not subscribe for and which cannot be sold to exterior investorsTheir commitment will have some wriggle room, but it would take a cataclysmic event for the US banks to walk absent from such an important client as SocGenAt first fleeting look, this means the rights issue poses a bigger danger for the underwriters than SocGen The fear is that SocGen’s share cost tumbles after they have set the subscription price for the new stock

If that happens, investors have no inducement to subscribe, and Morgan Stanley and JPMorgan would have to pay money for up the entire issue at its exaggerated subscription priceIn these highly volatile markets, this is genuine risk similarly, SocGen’s share price could tumble after the rights issue price has been put if there were new revelations of systems failuresThe underwriting banks can minimise this danger by pricing the issue at a huge reduction to SocGen’s prevailing share price

The bigger the reduction, the more likely the subscription cost would stay below SocGen’s market priceThe snag is that the company’s organization tend to resist pricing share issues at a big reduction It is seen as a sign of weakness, since the potential strength involved is greaterFortunately for SocGen’s underwriters, the bank’s split price has already fallen in anticipation of the issue

That should give them some soothe in pricing an undramatic discount – say, about 25 per centsimilarly, speculation about a bid from BNP Paribas may prevent the shares falling much furtherSocGen’s cash may be safe but if its own shareholders snub the subject, that would be hugely damaging to the credibility of Daniel Bouton, leader executiveThis could become apparent quite quickly

Investors who do not want to subscribe to the issue can sell on their rights to pay money for the discounted stockSome trading of these human rights is to be expected But heavy trading would be an early signal that SocGen’s existing shareholder hold up for the company is half-heartedPeople shut to both the market and investment banks say some evade funds are already planning to mop up these rights, which could destabilise SocGen’s saver register

If it became clear that was happening, SocGen might favor a merger with BNP as an alternativeThese factors add worry to the timing of the issue SocGen will desire the terms of the issue settled as soon as likely, to give some impetus to the processBut the underwriters would probably rather wait until after the bank’s annual consequences are out on February 21, since investors will want to see these before creation a decision about investing

A compromise would be to unveil the conditions before the results but defer trading in the human rights until later A green light early this week, with a three-week advertising period, looks likelyIt all makes for one of the highest-stakes human rights issues in years Some investors see it as an acid test for the banking sector, given that it is predictable that some other European lenders will desire to raise equity too

Above all, a smooth and successful rights subject would help repair the reputational damage that SocGen and the French monetary system has sufferedCopyright The Financial era Limited 2008Transcript: Interview with Jérôme Kerviel’s lawyer - Feb-10Kerviel’s lawyer accuses SocGen of complicity - Feb-10Doubts on Kerviel’s one-man show - Feb-08Judo fan’s grip on finance - Feb-08Bretons join to defend one of their own - Feb-08Kerviel accused of €14bn income cover-up - Feb-07More in this section* Minimum delay 15 minutesAll era are London timeFT HomeSite mapContact usHelpAdvertise with the FTMedia centreStudent offersFT ConferencesFT SyndicationCorporate subscriptionsFT collection Copyright The monetary Times Ltd 2008 "FT" and "monetary Times" are trademarks of The Financial Times Ltd

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