I saw the fine print of the fee section of the rights issue which listed the underwriting fee and separate advisory fees for the work done. The advisory fee was 1.5% plus a $35,000 arranging fee for the non-JLM brokers.
The 3% underwriting fees is not an advisory fee. It is payable to the capital markets' teams of investment banks for reserving the bank's capital against a potential obligation to take up shares. Its purpose is to compensate for the opportunity cost of not having bank capital and the risk associated with potentially taking a position- in this regard underwriting fees are an option premium.
If the potential obligation is crystallised then the bank has lost part of its regulatory capital, and must either offload the position in an orderly process (potentially subject to any conditions described in the Underwriting Agreement) or find a permanent home for the shares potentially living with the riskier balance sheet.
To the extent that sub-underwriters are long term holders of PXS willing to take-up a larger shareholding, then I agree the overhang will be reduced. We will have to wait and see who files amended substantial shareholders' notices as a result of the issue.
Otherwise the underwriters and sub-underwriters have the same incentives. Sub-underwriting is all about offsetting the magnitude of the risk when measured against the investment bank's capital. In exchange for sub-underwriting the sub-underwriters take a share of the Underwriting fees.
PXS Price at posting:
$1.05 Sentiment: Buy Disclosure: Held
