Short Rule Makes ANA Offer A Hard Sell Overseas

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Published: July 20, 2012

Japan’s regulatory crackdown on insider trading depressed hedge fund interest in All Nippon Airways’ USD$ 2.2 billion share offering, highlighting a new challenge for Japanese firms looking to raise funds overseas.

There were two surprises in the terms announced by the airline this week: an unusually high discount of 4.2 percent and an allocation split that left just 13 percent in the hands of overseas investors, less than half the targeted 30 percent.

Hedge funds that would have normally jumped on the offering shied away in part due to a new regulation introduced in Japan in December that limits short selling ahead of equity offerings, often a lucrative trade in the past, bankers said.

“The big hedge funds that normally rank among the top 10 subscribers from the start showed no interest in this offering,” said a banker who worked on the JPY¥175 billion (USD$ 2.2 billion) offering, the largest by a Japanese company this year.

The rule, similar to “Regulation M” in the United States, prevents a fund that sold a stock short after a company announces plans to raise equity from then turning around and covering that short position by buying into the offering.

The regulation is a pillar of the efforts by Japanese regulators to stamp out widespread insider trading ahead of secondary offerings. The Securities Exchange and Surveillance Commission launched an investigation into the issue in 2010 and has brought five cases against asset management firms since March.

Before the new rule, fund managers would routinely short the stock of a company raising equity — either on speculation ahead of or following the official announcement — and then buy into the offering weeks later to close out the position. The stock would usually tumble and factoring in the average discount of around 3 percent it was a consistently profitable trade.

The sharp drop-off in short-selling pressure tied to the ANA deal meant the stock fell only 14.3 percent since July 2, the day before it announced the offering, a relatively solid showing considering shareholders are being diluted by nearly 40 percent, bankers said.

Michael Kretschmer, who manages a long/short Japan fund for Netherlands-based Pelargos Capital, said the ANA offering points to a new challenge for Japanese companies in the absence of what was previously automatic demand from hedge funds.

In addition to offering a larger discount, they will need to better explain why they are raising money, he said.

“Natural demand from the shorts isn’t there anymore, and you have to discount your stock. The official guidance is usually 3 to 5 percent, but I think in the future, the band will stretch quite a bit,” Kretschmer said.


ANA said it would use the funds raised to pay for fuel-efficient Boeing 787 Dreamliners, shore up its balance sheet and build up a war chest to invest in growth opportunities in Asia, including taking stakes in or buying rival carriers.

But while institutional investors may have agreed with ANA’s strategy, many were looking for a lower price. There was a good level of interest around JPY¥179, well off the final price of JPY¥184 announced on Wednesday, two bankers said.

Instead of selling stock at a bigger discount to meet the targeted allocation to overseas funds, ANA decided to fall back on demand from Japanese retail investors and raised the domestic proportion to 87 percent from the targeted 70 percent.

Airline shares are generally popular among individual investors because ownership comes with ticket discounts and other benefits.

“Due to the introduction of Regulation M, the contingent of hedge funds eager to short the stock disappeared. But in the end, there was a large number of people who simply wanted to buy and hold our shares,” an ANA executive said, speaking on condition of anonymity because the deal is ongoing.

The offering’s subscription period ends on Friday, with payment due next Wednesday.

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