Here comes a flood of discounted rights issues for shareholders

It’s a slippery slide as a company tries to raise the money at an attractive price to get the funds and investors try to grab a bargain.

Here comes a flood of discounted rights issues for shareholders - if you think this market is in bargain territory, wait until you see what companies might have to do to raise money in what could quickly become a race against the clock.

In this first round of what may well be a long game, the bulk of the discounted raising are coming from mid-tier players such as IDP Education, retailer Kathmandu or travel group Webjet.

But it is likely that blue chips will not be far behind if this market endures a major second downswing - we remain in a bear market and more than 20 per cent off February peaks.

Should you buy into any of these deals? If you already have shares in a company it is very likely you will be offered stock - such as the “one-for-one” offer from Webjet - since new ASX rules are designed to ensure retail investors get identical - or better - offers than institutions.

In many ways every raising is a poker game - the company tries to raise the money at an attractive price to get the funds, the investors tries to grab a bargain.

There are risks for both parties.

A company can raise money in a rights issue and by the time the exercise is “closed” the share price has rebounded. Conversely, a shareholder might subscribe to what was a “heavily discounted raising” only to find weeks later the stock is lower even than the discounted offer price.

Hearing device maker Cochlear has had no trouble raising more than $800m. Travel group Webjet had to mount two attempts in recent days to get its raising off the ground - the Webjet retail offer is at 32 per cent discount according to the company.

At Cochlear - where the institutional raising was priced near $140 on a discount of around 17 per cent, you now have a situation where the company offered stock at $140 and the company is trading on the ASX this week at $195, after a low some days ago of about $159.

Whether you respond to a raising will depend entirely on your view of the company and the “visibility” of earnings which are obviously better at Cochlear than at Webjet.

Either way, veteran fund managers say the best way to play a retail issue is to wait until the very last days of an offer before you make your move - that way you are in the best position to see what has happened to the stock since it made the original announcements. Retail raisings generally take at least two weeks - for example the Webjet raising does not open until April 8 and closes April 20.

Patient investors might see a lot better “bargains” than we have seen to date. If the market moves into deeper bear territory then companies will be forced to offer seriously big discounts just to survive.

Perhaps the most famous discount in history was the 74 per cent discount on shares offered by the giant Swedish telecom conglomerate Ericsson in the wake of the dot com crash in 2002 - the company, which is still with us, offered shares at a price that was the same as a decade earlier.

If Cochlear’s offer had been Ericsson style, the raising would have been at $76 not $140. Now that would be a bargain.