Link REIT Escape Clause Designed To Protect The Small Investor...

The aborted attempt to securitize the retail shops and parking space assets of Hong Kong's public housing estates in last year's failed issuance of the Link REIT, caused losses for retail investors, but of varying degrees. If one had oodles of cash in their bank accounts and posted the money for a week or so in the underwriting process all that was lost was the forgone interest and rates were about 0% at that time.

However, those investors that borrowed funds, up to 90% of the allocation that they put in for, ended up paying interest on the borrowed funds but never had the opportunity to recoup when the deal collapsed.

So, new rules have been put in place to protect the small investors. The principal reason why this is even relevant is that the demand for these securities outstrips the supply and small investors either want to get an allocation that makes sense [a small allocation of say 1,000 shares can be irrelevant for some people] or not get shut out at all from investing. So one has to use gamemanship and subscribe for a much larger allocation than one actually wants with the understanding that the deal will be multiple times oversubscribed and the investor will get cut back substantially. You can see my earlier piece on this process.

This new scheme, although protecting investors somewhat, still does not go far enough to alleviate the issues of another court challenge. I suppose if the courts challenge the deal and the underwriting period is extended indefinitely, then theorectically, those investors that borrowed funds may pay very high interest charges. So they may be inclined to cancel and the shares will be allocated to institutional investors that are not required to post cash for the shares subscribed to.

So, the legal challenges should be addressed through proper legislation allowing the deal to go forward, not some allowance that precludes individual investors from participating.