By Lars Mucklejohn

Of Financial News

Last year marked the worst period for London IPOs since the financial crisis. But for the banks that earn fees advising on them, another equity product proved lucrative: share buybacks.

Buybacks are big business, and getting bigger. Last year, FTSE 100 firms committed to at least 57 billion pounds ($71.70 billion) worth of buybacks, according to investment platform AJ Bell. That was the third straight year above 50 billion pounds, and FTSE 100 firms have already laid out plans to return more than 17 billion pounds through buybacks this year.

"You can't help but notice the volume at the moment is off the charts," one fund manager said. "It's become such a big part of capital allocation."

Most big investment banks offer services to repurchase shares on a company's behalf. Morgan Stanley helped Lloyds Banking Group with a 2 billion-pound buyback last year and has just finished a program for HSBC of up to $3 billion. Oil and gas giant Shell hired Natixis for a $3.5 billion buyback which began in January. Consumer goods firm Reckitt Benckiser has turned to HSBC, Deutsche Numis and JPMorgan to run three respective tranches of a 1 billion-pound buyback.

But for all the activity in the market, details about how these deals work are few and far between.

Some argue banks are fairly compensated for taking on risk and that their practices are widely accepted.

But other investment bankers say not all corporates fully understand the process and end up stung by surprisingly high fees that ultimately mean less cash being returned to shareholders.

U.K. regulators want to know more about share buybacks, too. Financial News revealed last month that the Financial Conduct Authority had launched a review to better understand how banks structure, market and execute buybacks amid their growing usage.

The FCA intends to make its findings public.

Executives use buybacks as a more tax-efficient alternative to dividends. Amid the wider slump in the U.K. stock market, they can also let executives signal that they think their company is undervalued.

A company can give its earnings per share a short-term boost by cancelling shares as well, but critics say some do this to hit performance targets for executive pay. Reinvesting more in the company's operations is better for shareholders, employees and the wider economy, they argue.

The FCA's scrutiny comes at a time when buyback execution deals are growing more complex. In the U.K., they typically now work in one of two ways.

The first is the plain vanilla option, where a listed company instructs its house broker to buy shares from the open market like an institutional order.

Payment is a fixed commission from the company agreed with the broker up front. The standard commission ranges from five to 20 basis points, depending on the size and duration of the buyback, according to a banker who works on the deals. At the higher end, a 200 million-pound buyback program would land the broker 400,000 pounds.

An increasingly popular alternative sold by larger investment banks is known as the 'VWAP-guaranteed', 'discount on VWAP' or 'guaranteed outperformance' method.

The bank structures a forward contract that guarantees the average purchase price of the client's shares will be a specific discount to their daily volume-weighted average price over the duration of the program. The bank's fee is based on how it performs against this benchmark.

VWAP-guaranteed products are attractive in theory, as they incentivize the broker to buy shares at the lowest possible price.

However, because the overall average price isn't volume-adjusted and the bank's traders decide when to buy, the benchmark is easier to beat. For example, traders can keep the benchmark higher by speeding up buying activity if the share price starts to fall.

Some contracts allow banks to choose from more than 60 definitions of 'volume-weighted average price' to determine the benchmark. That includes differentiating between exchanges and times of day, according to bankers.

"Within these contracts, banks typically give themselves a lot of wiggle room to choose whichever volume-weighted average price metric suits them at the end of the buyback period," one boutique banker said. "They're really marking their own homework. I would seriously dispute whether the corporates really understand what they might be in for."

Not everyone agrees with that analysis, however. "These products do carry risks but then, on the counter side, carry a lot of benefit to the corporate clients," said a banker at UBS, who declined to be named.

"The ability for a company to exercise discretion on a daily basis as to whether or not you buy shares is quite difficult, particularly in a volatile market environment. The idea of handing it on so you can continue running your business is appealing."

It is unclear how popular VWAP- guaranteed or similar products have become, given firms are not required to disclose their usage. One banker said they account for at least 70% of buybacks, while another put it at between 30% and 80%. A third said they are "probably the majority."

It is also difficult to assess how lucrative they are. U.K.-listed firms must disclose the volume and price of shares repurchased every day; however, they do not have to consolidate this information for the entire program, which can often take several months.

For British corporates using VWAP-guaranteed products, it isn't uncommon for buybacks to incur total costs of between 6% and 8% of the firm's budget for the program, according to a banker with direct knowledge of the deals. These numbers include fees, stamp duty and share price movements.

Another banker put forward a range between 4% and 7%. "There's a lot of value leakage not going back to the shareholders," the person said. "If you take that number across the total value of buybacks, in any one year it could be 1.5 billion pounds, 2 billion pounds, more. I think the institutions aren't aware of that."

An executive at a large European bank rejected these estimates.

When banks succeed, the proceeds can be lucrative. Documents seen by FN show brokers charging as recently as last year variable commissions of between 4% and almost 9% for FTSE 250 buybacks. For a 200 million pound program, the latter would mean nearly 18 million pounds going to the broker alone.

In the U.S., where disclosures are less detailed, coming monthly or quarterly instead of daily, the average total cost is typically closer to 3%, a banker said.

The U.K. government has put financial regulators under pressure to show they are helping to promote the country's global competitiveness.

On the other hand, brokers can rack up losses in times of volatility.

"Think about it in terms of a portfolio. Banks can lose money and have lost money," said the UBS banker. "Banks can sometimes hedge their positions, which has the impact of lowering the possible upside as well as the downside."

For some banks, executing share buybacks is less about a quick buck and more about deepening ties with a shrinking pool of U.K.-listed firms.

As one senior dealmaker at a European bank put it: "The biggest benefit for a bank is impressing the company's chief executive by supporting its share price." Success opens doors to big-ticket advisory roles, they said.

A rival dealmaker agreed, adding that their firm has likely made an overall loss on VWAP-guaranteed products, including "multimillion losses" on single programs.

The FCA didn't respond to a request for comment for this story. The regulator plans to complete its review by the end of March.

Financial News is owned by News Corp, the parent company of The Wall Street Journal and Dow Jones Newswires.

Write to Lars Mucklejohn at lars.mucklejohn@dowjones.com

Website: www.fnlondon.com

(END) Dow Jones Newswires

By Justin Cash

Of Financial News

Challenger exchange Aquis will take a 3.7 million pounds ($4.7 million) hit on the back of higher credit risk from a number of technology clients.

Aquis said Tuesday it had "increased its expected credit loss provisions in respect of two existing technology clients, reflecting a heightened credit risk" for 2024.

It didn't detail who the clients were, the nature of the risk or how it was discovered.

Aquis declined to further comment when approached by Financial News.

Aquis said it "remains focused on diversifying its technology client mix, and is encouraged by recent growth and positive momentum in the late-stage sales pipeline." The rest of its guidance remains on track and it retains a net cash position of 13.7 million pounds as at Dec. 31, 2024.

Swiss exchange group SIX launched a 225 million pound bid for the City bourse in November. Aquis said Tuesday that the deal is still on track to complete in the second quarter of this year.

Financial News is owned by News Corp, the parent company of The Wall Street Journal and Dow Jones Newswires.

Write to Justin Cash at justin.cash@dowjones.com

Website: www.fnlondon.com

(END) Dow Jones Newswires

March 04, 2025 05:20 ET (10:20 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.