Stock market speculators attempting to cash in on turmoil at British companies raising money from investors to survive coronavirus pandemic
Stock market speculators are attempting to cash in on turmoil at the British companies raising money from investors to survive the coronavirus pandemic.
Short-sellers have swooped on Premier Inn owner Whitbread, Aston Martin and events firm Hyve, which have raised £1.5billion through rights issues.
They are the only UK firms to raise funds through rights issues, where existing investors are offered the chance to buy new shares, usually at a discount.
Turmoil: Short-selling involves borrowing shares, selling them, buying them back hopefully at a lower price, before returning them to the lender for a profit
Most others have opted to raise money through placings, which usually bypass private investors and are conducted behind closed doors with new and existing institutional investors.
Unlike with placings, which are often priced when they are announced, rights issues are a lengthier process and have to be approved, giving short-sellers – normally hedge funds – an opportunity to engineer a profit.
Short-selling involves borrowing shares, selling them, buying them back hopefully at a lower price, before returning them to the lender for a profit.
During rights issues, short-sellers can also exploit technical price differences by buying up the rights to the newly issued cheaper shares while shorting the shares.
Guevoura, a Gibraltar-based hedge fund, has placed bets against all three companies in recent weeks – the only short positions it has disclosed since last July.
It disclosed a £30million short position in Whitbread on June 4, but closed it on Wednesday when the company, whose hotels have been shut during lockdown, completed its £1billion rights issue.
It made a similar move with troubled Aston Martin in April and closed its short position on the day it completed its £356million rights issue in April. Guevoura could not be reached for comment.
The £127million rights issue for Hyve, formerly known as ITE Group, whose events have been on hold during the crisis, completed on Friday.
And another hedge fund, Londonbased LMR Partners, closed its short position in Hyve on Thursday, having only disclosed a bet against the shares at the start of the month.
LMR has also shorted shares in Whitbread recently, according to data published by the Financial Conduct Authority. LMR did not respond for comment.
The tactics have echoes of the financial crisis when short-sellers were vilified for attempting to drive down the share prices of companies such as HBOS to make a profit.
Former business secretary Sir Vince Cable told The Mail on Sunday: ‘It is a worrying commentary on our financial institutions, like hedge funds, that they discourage firms from raising risk capital rather than borrowing or running to the Government for help.
‘We need a complete rethink of our systems of tax and regulation which are biased against long-term investment and equity and biased towards speculation and debt.’
During the financial crisis in 2008, the then-City watchdog, the Financial Services Authority, introduced rules forcing hedge funds to disclose their short positions to give more transparency, but stopped short of banning short-selling.
Since then, the FSA’s successor the Financial Conduct Authority has introduced rules meaning all substantial short positions must be disclosed.
Last month, the FCA issued guidance to investors, warning short-sellers about their conduct during a period where many companies are looking to raise funds.
It said short-selling can act as a useful tool to ‘liquidity and price discovery’, but added: ‘Where we have concerns that there are significant opportunities for abusive behaviour, our monitoring will increase in intensity accordingly.’