Ann: AIA strengthens its balance sheet with an equity raise, page-3

I estimate that, over the next few months, more than $60bn of equity capital will be raised in the Australian market as companies shore up their balance sheets (the banking sector, alone, is likely to account for $20bn of that is my rough guess).

Small investors can profit handsomely by arbitraging these raisings, to the extent that they include a Share Purchase Plans (and especially where those SPPs include options for over-subscriptions).

The "arb" tactic works like this:

1. Identify good-quality companies [*] that are likely to need to raise capital

2. Buy a minimum number of shares (I suspect that, for most brokers, this is equivalent to $500 worth)

3. Wait for capital raising

4. Participate in SPP to fullest extent possible

For example, looking at AIA's balance sheet, and the tenor of it borrowings, one could have been reasonably sure the company would need to raise capital (frankly, I'm surprised it didn't occur weeks ago), so if one bought $500 worth of shares at a price of , say $5.50, and one participated fully in the SPP ($47,000, in this case), the arbitrage profit will be around $4,500 (assuming the stock trades at the theoretical ex-raising price (TERP...assuming the placement clears at $4.50/share this will effectively be a 1 for 4.5 raising, so TERP is $4.94/share):

(Note: All NZ$ figures... but not too dissimilar A$ outcome given A$:NZ$ rate is 1.02 currently)

There are a number of good quality companies (particularly the banks, listed property trusts, and infrastructure stocks) where one could look to find similar situations in which additional capital might not have needed if it were not for this crisis, but where it is now suddenly necessary.

With the outlay of, maybe, $10,000 (so 20 of these similar potential capital raising arb situations) if one was only half right in identifying the right companies, it would potentially mean an easy $40k or $50k overall profit, for a $10k capital outlay.

(And the ones where one's assessment was wrong - i.e., companies that ended up not needing to raise capital - well, to the extent that the market was pricing in a need for additional capital which was not required, the prices of those companies would probably end up being higher for it, anyway.)

[*] NB. This exercise is likely to not work for micro- and small-cap stocks where equity raisings usually take the form of institutional placements, without SPPs.