By Michael Evans
INVESTMENT banks faced numerous potential conflicts of interest as they advised companies on repairing their balance sheets during the global financial crisis, enjoying a ''bountiful'' time as they sucked up nearly $2 billion in fees.
ISS Governance's report into capital raisings from 2008-09 showed the banks earned $1.9 billion in fees paid from shareholders' money advising companies on how to repair their debt-filled balance sheets.
The report raises concerns about ''the way in which capital was raised'' and its ''implications for future raisings''. Chief among them were:
The apparent reliance on placements rather than accelerated rights issues in cases where listed companies appeared not to need to raise capital so urgently as to dispense with pre-emptive rights;
The inherent conflict of interest of the role of investment banks acting as both underwriter and price adviser on raisings;
The rationale for the high fees paid to investment banks which, with a handful of exceptions, were not required to take up securities under underwriting agreements and the general lack of transparency of non-preemptive rights issues.
ISS highlighted how fees above 2 per cent of the amount raised were ''often'' paid even though ''it was not clear why such high fees were paid''.
League tables have shown the Swiss bank UBS was the dominant adviser at the time.
Companies under pressure to raise money to pay down debt as the credit crunch tightened paid the highest fees. ''Some entities were clearly 'price takers' during this period and needed to obtain capital at whatever price investors were willing to pay,'' the report said.
It criticised use of accelerated entitlement offers given their benefits to banks: ''In many cases it is not clear why the speed provided by an accelerated entitlement offer was necessary given how few listed companies disclosed covenant breaches or potential covenant problems to the market at the time capital raisings were conducted. Accelerated entitlement offers do, however, provide clear benefits to underwriters.''
The potential for conflicts of interest existed for investment banks too. They included conflicting interests between advising on pricing and providing underwriting and the trading opportunities available to bank clients from participating in a discounted offering.