AMP shares closed at a new all-time low yesterday as investors and sector analysts started wondering if the troubled wealth manager might have to stage a big capital raising to offset the losses incurred in being forced to keep its underperforming Australian and New Zealand life business.
AMP warned on Monday that a plan to sell its life insurance business for $3.3 billion to vulture investor, Resolution Life was “highly unlikely” to proceed, and it cut its interim dividend and indicated there could be another $800 million or so in write-offs coming.
As well the sale’s demise means shareholders will not be given $755 million in capital returned planned from the proceeds of the sale.
AMP shares dipped to close at $1.80 yesterday, down from Monday’s $1.81.
In notes yesterday several analysts wondered if the company might be forced to ask shareholders for new capital – or make a big placement to major institutions.
Citi analysts said if there is no sale, it could leave AMP in the tricky situation of not having enough capital to fund a major overhaul of its advice business.
“It may, therefore, be left with a stark choice of either delaying the strategy’s implementation or coming to market to raise capital,” wrote the analysts.
Macquarie analysts, who are “neutral” on the stock, said AMP shareholders are facing a “binary outcome.” The company can either sell its insurance business for a lower price, or keep the life business, and gradually run it down.
“We see a risk of a capital raising, particularly if a transaction doesn’t occur,” Macquarie analysts wrote.
Bell Potter isn’t ruling out a raising, either. It says AMP’s move to cut the dividend to zero is a “terrible sign” and may suggest the need for AMP to take more provisions.
“We continue to argue its client refund provisions are below that of the major banks, and any meaningful change here may result in the company requiring an equity raising to maintain healthy capital buffers.
Complicating matters is the weak AMP share price and the fact that shareholders do not trust the company – they have voted by selling the shares off over the past year, getting a major issue away to all holders would be impossible and it would have to be done at a deep discount, and even then that might be opposed because of the dilutionary impact on existing holders.
For those reasons, AMP would be very reluctant to go to shareholders to approve a major issue.
Companies can make placements of up 15% of their capital without shareholder approval. Therefore the AMP, which as around 2.95 million shares on issue, can issue around 445 million shares without needing the tick from shareholders.
At a price of say, $1.50 a share (a 16% discount), AMP could raise around $660 million. A deeper discount might be needed, say 40 cents a share, which would raise around $600 million.
But such an issue would be a one-off and the company has not the standing with shareholders for a second bite.
