Capital Markets & Investor Relations

IR Monitor – Monday 30th March

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Welcome to FTI Consulting’s weekly IR Monitor

This week, we include the joint statement by the FCA, FRC and PRA which sets out actions to ensure the continued functioning of the UK’s capital markets amidst the COVID-19 crisis. We also look at the FCA’s decision earlier in the week to dismiss a ban on short selling, contrary to the moves of other European countries. A similar sentiment was echoed by the CEO of the Investment Association, Chris Cummings, who called on the Bank of England and FCA to keep markets open. Staying with COVID-19 reaction, we cover the potential relaxation of shareholder protection principles to allow companies to raise cash quicker. Next, we look at the large number of shares sold by top executives which, despite the tendency for selling at this time of year, are considerably higher than in previous years. Virtual AGMs have become a talking point as they become the norm during the COVID-19 crisis. Consequently, we assess ShareAction’s advice to the government that these should not become a permanent fixture. Finally, we look at the different approaches companies are taking toward their dividend policies.

This week’s news

Covid-19 Joint Statement – 26 March 2020

On Thursday 26 March, the Financial Conduct Authority (FCA), Financial Reporting Council (FRC) and Prudential Regulation Authority (PRA) issued a joint statement announcing a series of actions to ensure information continues to flow to investors and support the continued functioning of the UK’s capital markets. Included in these actions was a statement issued by the FCA that will allow listed companies an extra two-months to publish their audited annual financial reports. The FRC offered guidance for companies preparing financial statements in the current uncertain environment, supplemented by PRA guidance regarding the approach that should be taken by banks, building societies and PRA-designated investment firms in assessing expected loss provisions under IFRS9.

FCA dismisses short selling ban

Investment Week reported on the FCA’s dismissal of moves by other European countries to ban short selling. On 23 March, the FCA disclosed its intention to keep markets “open and orderly” and that, despite COVID-19 volatility, “markets have continued to operate in an orderly fashion in the UK”. The FCA noted that aggregate net short selling activity was in fact low as a percentage of total market activity and that it had decreased. In addition, it noted that short selling was a crucial underpinning of liquidity provision. Jack Inglis, CEO of the Alternative Investment Management Association (AIMA), said this was the correct way forward: “We have seen stock markets plummet in response to the coronavirus crisis as investors prepare for a global recession. To suggest hedge funds are exacerbating the current market crisis through short selling is absurd. As a small part of the investment funds industry, hedge funds cannot and should not be held responsible for market declines.”

IA calls on BOE and FCA to keep markets open

Investment Week also reported that Chris Cummings, CEO of the Investment Association (IA), has called on new Bank of England governor Andrew Bailey and the Financial Conduct Authority to keep the UK markets open during the current coronavirus crisis. In an open letter published 25 March, Cummings made clear his support for markets to stay open in order to continue meeting clients’ needs. He noted that “as investment managers, our utmost priority remains serving our clients’ needs in these testing times. Access to public equity and debt markets is a critical component in our ability to do so.” Cummings also highlighted the importance the industry plays in helping global governments tackle the COVID-19 crisis by raising funds to pay for their respective health programmes.

City groups in discussions to help struggling UK businesses

The Financial Times reported that large investors and institutions across the City of London are considering relaxing shareholder protection principles in order to allow British firms to raise cash quickly during the COVID-19 crisis. The organisations have already held talks that would allow the bypassing of pre-emption rights that give existing shareholders first refusal to new share issues. Under current guidelines companies are allowed to raise up to 10 per cent of the share capital without first giving original shareholders a right of refusal. However, some companies have issued up to 20 per cent using a cash box structure, allowing companies to bypass pre-emption requirements. Several companies have already sought to raise money in the market to shield their balance sheets after the sharp fall caused by COVID-19. Stock broker AJ Bell commented that this shows companies have “already exhausted all the easy avenues for borrowing more money.”

Bezos, other corporate executives sold shares just in time

The sale of shares by the CEO is always a sensitive topic for the Investor Relations Officer. The Wall Street Journal reported that roughly $9.2 billion in shares of US traded companies were sold since February, by top executives at those firms. The largest executive seller, having sold a total of $3.4 billion in the first week of February, was Amazon’s Jeff Bezos. He sold approximately one third of his holdings in the company. Though there are no suggestions of insider trading, the Wall Street Journal notes, but even given the incentive to sell whilst the market peaked in February, and the tax related reasons for which executives tend to sell shares at this stage in the year, this year’s sales were still higher by about one third than in the previous two years. They also found that more than 150 executives and officers sold at least $1 million worth of stock individually in February and March despite having sold no stock in the past 12 months. Laurence Fink sold $25 million of his company shares on February 14th.

Virtual AGMs must be a virus one-off, campaigners tell government

Financial News reported that due to the rise of virtual AGMs, as a response to the social distancing measures imposed by the government to tackle the Covid-19 crisis, ShareAction has called on the UK government to ensure that this trend does not become a permanent fixture. The responsible investment campaign group voiced the concern that virtual AGMs pose a threat to shareholder democracy, as according to the group they inhibit shareholders’ ability to have ‘unscripted’ conversation with the Board. They also believe that the technologies being used for virtual AGMs allow Boards to ‘cherry pick’ the questions they want to answer in advance, thus evading more complex queries and weakening the company’s sense of public accountability.

And finally…death by 87 cuts

In the week ending Friday 27th March, 87 companies reviewed their dividend policies. Of these, 15 companies have postponed making a decision for now. Of the 72 companies who made an active decision, two chose to merely cut the dividend (rather than cancel it altogether), one chose to defer payment and one chose to offer a scrip alternative instead of a cash payment. The vast majority of companies, however, have chosen to cancel the dividend outright (of which 18 interim dividends and 50 final dividends). Andrew Brough of Schroders posted a paragraph on LinkedIn on the subject ‘Will dividend payments from companies ever reach last year’s level again?” Brough comments on the vast difference between the £104 billion in dividends paid out to pension funds and individuals by UK quoted companies last year when compared with the wave of cancellations being made to dividends in this quarter. Like many other investors, he wonders whether this is a one-off situation or whether the Covid-19 pandemic will change the proportion of their earnings that companies give out in dividends in future years as they now see the importance of keeping large cash buffers. If you would like to receive FTI’s document summarising changes in dividend policy across the market do get in touch with the IR team.

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