How the Canadian market has changed.
For years, it was rare to see a bought deal be withdrawn. In fact, it was almost unheard of. Underwriters understood that when they put in an aggressive term sheets, they would own the stock and it was their responsibility to re-sell it, for better or for worse. If a deal was hung, they took the losses.
These days, though, underwriters aren’t scared to withdraw a deal that isn’t selling, or to at least amend its terms. And the more often it happens, the more likely it will be condoned because amendments become a norm.
The latest deal to be yanked is Great Basin Gold’s $50-million bought offering, led by RBC Dominion Securities. A week ago the company tried to sell 61 million common shares at 82 cents each. On Thursday it was revealed that the original deal had been terminated and replaced by a new offering for 66.7 million shares at 75 cents each. As a kicker to sweeten the offering, Great Basin decided to add in a new half warrant for every share purchased. The company could not be reached for comment.
A similar situation played out in December when Karnalyte Resources withdrew its $115-million bought deal. Though the firm said it had to pull the deal because regulators had some questions, and answering them would force the firm to miss its deadline to file a final prospectus, the underwriters got lucky because the offering was worth almost half of Karnalyte’s market capitalization, and the stock had fallen 13 per cent since the deal had launched. A few days later, Karnalyte said it would pursue new bank debt instead.
The list goes on. Facing a rough market a few months back, Sulliden Gold Corp. decreased the size of its deal from $75-million to $50-million, and before that San Gold Corp. cut its deal from $130-million to $80-million.
To be clear, no laws are being broken when these deals are amended. The clients are always on board because they have to provide consent to break the original underwriting agreement.
But that doesn’t make it right. If a dealer bids aggressively and gets burned, they should wear it.
I can hear the counter-arguments already. “But if a deal gets hung, the company’s stock price will suffer,” you say. That’s true. But it’s part of the game, and the advice the dealers provide should be cautious enough to prevent such big overhangs.
The way things stand, dealers can too easily offer up bad terms and get away scot-free.