Och-Ziff has signed a swap agreement with JP Morgan and Deutsche so that it, and not the banks, is shouldering the slight risk of a collapse in the Phoenix share price
That was a smart piece of financial footwork by Phoenix Group, the indebted life assurer. With the help of US hedge fund Och-Ziff and big shareholder Sun Capital, it is raising £250m via an equity offer.
The cash will help to pay down debt and has transformed the banks’ stance towards Phoenix – they have lifted restrictions on dividends and the management has greater freedom to breathe. The shares rose 8% to 639p, well above the 500p at which the new equity is being issued.
But what’s this strange line in the announcement of the placing and open offer? “The open offer is fully underwritten by Deutsche Bank and JP Morgan Cazenove with the Och-Ziff funds taking any economic exposure.” Eh? An underwriter that isn’t taking any economic risk is not an underwriter. Whatever the two investment banks are contributing to this deal (advice?), it’s not underwriting.
The detail of the announcement explains. Och-Ziff has signed a swap agreement with JP Morgan and Deutsche so that it, and not the banks, is shouldering the slight risk of a collapse in the share price. So Och-Ziff is really the underwriter. In effect, it has agreed to buy £80m-worth of Phoenix shares on a firm basis and has said it will take any or all of the £170m-worth that other Phoenix shareholders don’t want.
But, as you may have guessed, JP Morgan and Deutsche still get to charge an underwriting fee. It’s smaller than Och-Ziff’s but is still 0.75% of the open offer, which amounts to £1.27m. One might reflect that investment bankers never used to get out of bed for such trifles. But the real question is why the underwriting fee for the two banks isn’t zero.