Although it is tough for retail clients of Beaufort Securities, whose accounts are temporarily locked-up (perhaps an insensitive choice of words…), Friday’s bombshell news has wider reaching implications. While this situation has generated risks to companies and individual portfolios, it may also throw up some short-term trading opportunities.
One key issue will be the loss of the funding stream from Beaufort placings for client companies. On Friday over 60 companies were forced to issue announcements about the situation.
In many cases, companies already have another broker (i.e. a pre-existing joint brokerage arrangement). It seems a near certainty that other brokerage houses will already be working their way through the list of Beaufort corporate clients and pursuing them like a committee of vultures (I’m not kidding, that is a correct collective noun).
In all likelihood, other than this being a temporary glitch while happy new brokerage relationships are formed, this will not cause any major long-term problem to companies affected. Other brokers will simply step into the breach. For all its failings, AIM remains a phenomenal conduit for raising money.
However, in the short term, the situation might become more acute.
The problem is that such funding was not simply the result of Beaufort acting as the broker. It was and is, dependent on the pool of capital held by its clients. Some £664m of assets for ~ 20,000 clients are held at Beaufort, and much of the funding for placings may well have come from “churn” in those portfolios. With all trading and asset transfers now frozen in those accounts, a potentially significant pool of capital has temporarily been taken out of the market. Other brokers may indeed step in to offer their services, but that will simply spread the remaining pool of capital more thinly.
Some companies have previously lived hand-to-mouth on Beaufort placings and have painfully thin balance sheets. Some seventeen different companies have been funded by two or more Beaufort placings in the last 12 months, and several have Beaufort as their sole broker. There are also special situations at Kibo Mining (LSE:KIBO.) and Nu-Oil and Gas (LSE:NUOG), which have both released RNSs stating that proceeds from their recent placings have not yet arrived and they are seeking clarification as to when (or indeed, if) they will receive those funds (here and here).
Paradoxically, however, the client account lock-down may also support the share price of many other companies.
Those who have had a placing recently, and where one might have expected a certain degree of selling pressure from placees flipping stock, may suddenly see that reduce as trading in those accounts is frozen. Such companies could well see some short-term share-price support as a result.
Another potential scenario for share price uplift might occur if anyone is short of any of Beaufort’s clients. Let’s just say (hypothetically of course) that a number of (uncovered?!) shorts exist in the market. If it turns out that such shorts exist and Beaufort was involved in these as facilitator or counter-party, its abrupt demise on Friday poses a serious problem.
Given the US Department of Justice only unsealed its indictment on Thursday, there would have been no time to prepare for this event. If such shorts do exist, those that might previously have hoped to cover in a Beaufort placing suddenly find themselves in an uncomfortable position. With the increased regulatory scrutiny this episode is bound to cause, will the shorts brazen it out or will they be forced to cover?
If any such shorts do exist and they are forced to cover in the market this would naturally be positive for the share prices of those companies, which had been targeted. Identifying those companies can be tricky, but watch out for any sudden moves on higher than expected volume by any of Beaufort’s former clients. That might be the best clue.
Overall, the collapse of Beaufort has undoubtedly dropped a very large pebble into the AIM pond, with effects that will only become clear as the weeks pass. While this is causing worry for retail clients as well as the hardship of a locked account, it may also throw up some short-term trading opportunities.
Author: Ben Turney
The author does not own shares in any of the companies mentioned
A list of Beaufort corporate clients who have undertaken a placing within the last 12 months, excluding IPO and AIM admissions fundraises (from http://www.beaufortcm.com/index.php/our-clients and http://www.beaufortcm.com/index.php/transactions).