how goodman got into this mess

some greedy investment banker said they were undergeared for the conditions so they borrowed as much as the could

then the whole bag of oranges fell apart

now that same investment banker is saying they have to recapitalise

but this time get will get their cut by underwriting a rights issue

lol

read this article by John Durie..its a beauty

The capital raising game

: John Durie | May 16, 2009
Article from: The Australian
NOT so long ago the investment banking industry was seemingly on its knees, but the wave of equity raisings in recent weeks has allowed the industry to engage in an almighty fee heist amounting to hundreds of millions of dollars at shareholders' expense.

No one begrudges fees for genuine risk taking, and the service provided by the industry in Australia has helped corporate Australia de-leverage to survive the recession and what federal Treasury thinks will be a 12 per cent fall in total corporate profits.

As an aside, this is three times the fall from the last recession in the early 1990s.

The capital raising game works along predictable lines, with the banks suggesting to the company it has too much debt (probably because the same banker told the board it has a lazy balance sheet pre-crisis) and should raise equity while it could.

The company will resist because the share price is too low and if you are like Goodman Fielder, then you have a few asset sales on the go and would rather do them first before any capital raising. The banker will talk around the market, increasing the pressure, telling everyone how vulnerable the company is and by accident some of this talk gets into the press, sometimes many times.

It's all designed to increase pressure, and this week the practice hit the heights or lows when an article published elsewhere suggested Goodman Fielder should follow Pacific Brands and raise equity as well as selling assets, and suggested UBS be an appropriate house to do the job.

Herein lies the issue: Goodman's boss Peter Margin no doubt laughed at the brazen attempt by UBS to pressure him, but corporate Australia needs to stand up to the banks or shareholders will be missing out big time. Normally the press articles are more subtle with "independent" analysis showing the company to be a basket case and in need of equity.

Today's rush of equity issues is tomorrow's earnings dilution.

Worse still is the practice of turning a partly underwritten deal into a fully underwritten deal when there is zero risk.

The banks attempt to minimise the risk by trashing the target's share price, then issue the stock at a discount, underwrite the institutional part of the raising and add cream by converting this into a fully underwritten offer. The last part is particularly heinous -- typically an underwriter will earn 2 per cent of the amount raised; then, when this money is committed, go around the fund managers seeing whether they want to sub-underwrite the retail portion.

With this commitment in the bag the banker goes to the company and suggests a fully underwritten issue, which means more money for the banker.

By way of example, GPT recently raised $1.7 billion in a deal in which UBS was the sole banker. It earned 2 per cent on the institutional issue of $1.4 billion or $28 million plus 0.5 per cent for managing the issue, or $7 million.

The $300 million retail offer ended being fully underwritten, which meant the fund managers got $750,000 or 0.25 per cent of the $300 million issue, while UBS, which had zero risk, picked up $5.25 million.

Then there was a discretionary incentive for doing a good job, which was another $1.75 million. In all, the fee pool of at least $42 million was small in the scheme of a $1.7 billion capital raising, but it's money the company's shareholders didn't get.

Such is the distrust between company and bankers that companies now hire advisers to advise on the advisers, with more money disappearing in the process.

The system stinks, yet there is no easy way out, in part because most companies invite investment bankers to the fee trough rarely, so don't know how much food to put in the trough and, of course, there are only a handful of banks capable of providing the funding advice.

Somewhat extraordinarily, then, the company management is cautious about biting the hand that helps it one day. Shareholders should demand better because it is their money going down the drain or, more to the point, being directed into investment bankers' pockets.