Corporate actions analysts and operations managers working remotely during the coronavirus pandemic could unintentionally end up leaving money on the table as they scramble to deal with companies either postponing some events or changing the terms of others.
That’s what Jonny Ruck, chief executive officer at London- headquartered corporate actions analytics technology firm Scorpeo is worried will happen if fund management firms and others don’t keep their eye on the corporate actions ball. The firm’s historical analysis has shown that even in good times, fund management firms have been a bit remiss in making the best financial decisions for some voluntary corporate actions, namely scrip dividends. Poor decisionmaking might apply to other voluntary corporate actions such as tender offers, mergers, exchange offers and rights offers.
At first glance it would appear that corporate actions managers have far less work to do now that traffic is slow. “The volume of corporate actions was flat in March and April compared to a year ago, but volumes are difficult to predict as corporate actions are events driven,” explains Stephen Cirami, head of class actions an corporate actions at New York-based operations outsourcing giant Broadridge Financial Solutions. “Since many corporate actions involve a financial consideration of some type the recent instability with the financial markets may cause some issuers to delay launching major corporate events such as tender offers or mergers.” Case in point: Xerox has postponed its exchange offer for HP.
Woodseer Global Dividend Forecasting, a London-based firm specializing in dividend estimates for over 25,000 securities worldwide says that since early March there have been over 100 dividend revisions globally. The phenomenon, the firm calls the “Divocalypse” is showing signs of slowing down and dividends could be reinstated down the road, it believes.
Appearances can be deceiving as the numbers and workload for corporate actions specialists don’t correlate. The opposite applies. “Given that some companies have decided to cancel or suspend dividend payments without clear notification, corporate actions operations managers have their hands full,” says Madhukar Ramu, head of data operations and global strategy for corporate actions at data analytics giant IHS Markit in New York. Rather than explicitly announcing their dividend payments would be cancelled, some European companies buried the news in their notices about cancelled annual general meetings. Others, such as Credit Agricole, decided to proceed with a dividend payment against recommendations of the European Central Bank.
The confusing information flow has left corporate actions operations managers needing to go the extra mile to track down the right data from multiple sources. “Corporate actions operations managers must closely monitor which companies are eliminating dividend payments or other events to notify portfolio operations managers and investors,” explains Jonathan Bloch, chief executive officer of London-headquartered Exchange Data International, a data vendor specializing in corporate actions.
Scorpeo’s Ruck believes that the decline in volume of dividend payments and some corporate restructurings during the coronavirus pandemic might be partially offset by a higher volume of two other types of voluntary corporate actions– scrip dividends and rights offerings– which is when the wrong decisions could be made. Scrip dividends, popular in the UK and continental Europe, give investors the choice of picking either cash or equities as payment. Issuers likely hope more investors pick equities so they can save money. In March the UK’s Capital & Regional, a listed shopping center owner, said it would change its final dividend payment for 2019 to a scrips dividend.
Corporations, closed-end funds and business development companies could also find rights offerings a less expensive way of raising capital than initial public offerings. Rights offerings give investors the opportunity to buy more shares at a discounted cash price with the number of rights required to purchase one share varying. Shareholders usually receive one right for every share held on record date. They can exercise some or all of their rights, sell the rights if they are transferable, or do nothing. Shareholders can also participate in the second oversubscription phase of the rights offering which gives them the right to right to buy shares not purchased in the primary phase. So far there have been only a few major rights offerings as companies don’t want the book value of their shares diluted. South Africa’s energy and chemical company Sasol just announced a US$2 billion rights offering, while Singapore Airlines has incorporated rights offerings into its US$13 billion funding package.
Processing income and dividend payments is typically a straightforward task for a fund management firm which just has to book the income and dividend payments to the right fund’s accounting system. However, in the case of voluntary corporate actions the fund management firm must spend time analyzing which types of payment are best: cash, securities or a combination of the two. If the management firm doesn’t make a decision in a scrip dividend, it will likely receive cash as a default payment. The same applies in some other voluntary corporate actions.
Ruck worries that overworked corporate actions managers might decide to overlook participating in some voluntary corporate actions or decide to pick cash as an easy option. In the case of scrip dividends, Scorpeo’s research has found that in the past fund managers have chosen cash over securities 75 percent of the time when investors might have been better off with cash. In the case of rights offerings, doing nothing could also be detrimental to shareholders. “If the fund manager doesn’t exercise it right to buy more shares it could end up with the book value of its shares diluted,” says James Curtis, an attorney in the securities practice of Dechert in New York. “Fund managers could have increased the book value of their holdings or kept the value constant if they had participated in the oversubscription phase of the rights offering.”
None of the corporate actions operations managers who spoke with FinOps Report would admit to overlooking any voluntary actions. However, they do acknowledge that the coronavirus pandemic has left them in a tight spot as the front-office corporate action analysts who typically make decisions on voluntary corporate actions have been reassigned to help traders monitor market fluctuations. As a result, say some US corporate actions operations managers, they have been given “standing instructions” from corporate action analysts with no further explanations and little time to interact.
Making their lives even more difficult, some US corporate actions operations managers tell FinOps Report, are delays in retrieving updated information on corporate actions due to network glitches working remotely and extra work processing payment claims. Those claims arise when payments are made to the wrong counterparty which can happen if a corporate event occurs between the time stocks are purchased and the time the time the transaction is settled. With offshore locations handling claims work often shut down due to the coronavirus pandemic, US corporate actions operations managers must pick up the slack.
Financial firms need to stay on top of their data collection and processing requirements and communicate seamlessly to clients including retail shareholders, warn some corporate action technology specialists. “Financial firms should review their corporate action data feeds to make sure they are receiving up to date corporate action information,” recommends Ramu. IHS Markit provides data and software solutions allowing clients to reconcile discrepancies between corporate action data sources to produce a final golden copy. Broadridge says that it also provides data scrubbing service across various data feeds and its Reorg Action application allows retail shareholders of subscribed broker-dealers to submit their corporate action elections through the web to be sent in real-time to their broker-dealers’ back offices.
However, when it comes to deciding what type of payment to accept in a voluntary corporate action most applications only go so far. They typically address one or more of tasks such as data collection, normalization, dissemination or decision capturing. Ruck says Scorpeo’s platform is an exception to the rule in that it can determine the optimal payment for a fund manager. Although currently offered strictly for scrip dividends, the firm plans to expand the platform into rights offerings, partial tender offers, and mergers and acquisitions in a phased approach depending on client needs.
Scorpeo does not charge annual licensing fees for its platform but a type of contingency fee — a percentage of the additional revenues achieved if it identifies an optimal corporate action election. That means only if it beats the fund manager’s decision. Therefore, one could argue that the firm has a financial interest in seeing fund managers blunder. However, Ruck insists that isn’t the case. “Fund management firms ultimately have a fiduciary obligation to their clients,” he asserts.
Given what corporate actions managers acknowledge is their new normal, fund managers might be well advised to take Ruck’s concern about making unprofitable decisions seriously. Since there is no legal requirement to participate in voluntary corporate actions, fund managers won’t have to worry about regulators calling them to the carpet. However, they will have to worry about complaints from Investors who are disgruntled with lower performance results. “Pension plans and other asset owners might start asking fund managers to justify their decisions or lack thereof when it comes to corporate actions,” says Ruck. That’s ultimately not good for business.