A group of hedge funds have taken a large position in the underwriting of Royal & SunAlliance’s pounds 960m rights issue and are expected to put the company’s share price under pressure in thenext few days.
The funds are playing a high-stakes game of chicken with more conventional institutional investors in the hope of making vast profits out of the insurer’s financial difficulties.
RSA’s chief executive Andy Haste decided to brave the market last month to shore up the insurer’s balance sheet. It has to cover more than $1bn (pounds 600m) losses in the United States, which may be even greater following RSA’s defeat in a key court case last week.
The insurer’s shares have fallen more than a third since it launched the rights issues last month, hitting a low of 81p last week before recovering to close at 86.75p on Friday. This is still perilously close to the rights issue price of 70p.
If the shares fall to near or below the rights issue price, many shareholders will not take up their rights, leaving the underwriters, Goldman Sachs, Merrill Lynch and Cazenove, with the shares.
These stockbrokers have sub-underwritten the share issues with institutional investors.
It is understood that hedge funds have taken large positions in the sub- underwriting. The fear is they will try to force RSA’s share price down by selling short – selling shares they do not own – in the hope of covering their position by getting the shares from the sub-underwriting.
Sources close to RSA fear this could seriously destabilise the company’s share price in the next few weeks.
