With market volatility at an all-time high, it is hard not to compare these last few weeks to the market upheaval we experienced during the GFC.
We expect many entities will find themselves navigating unexpected challenges. What options are available to listed entities that find themselves particularly impacted by these difficult times? Depending on the circumstances, there are a number of different options available, one of which is raising equity capital. If you have a business that may need to raise funds, it is important to start thinking about this now, as we expect there to be many more entities in need of capital in the coming weeks and months.
What capital raising structure may be appropriate depends on the size and urgency of the funding required; the extent of the market volatility; the cost of capital associated with each particular option; the availability of underwriting support; and the interests and financial position of existing and potential shareholders.
The key methods for raising secondary capital in Australia are:
Share purchase plans
Dividend reinvestment plans
Will the investor market be supportive of the same type of discounted placement and rights issue capital raisings undertaken as balance sheet repair measures by a number of entities during the GFC? We suspect there will be a number of market participants seeking out value.
During the early stages of the GFC, companies raising equity capital favoured the use of placements because of the short timeframe to settlement minimising market risk at a time when retail investor appetite was low.
Towards the later stages of the GFC the ‘accelerated’ non-renounceable rights issue became a popular method for raising equity capital. By the time market conditions had begun to stabilise, the accelerated rights issue was a way to access the majority of capital from institutional investors up front whilst also providing retail investors with the opportunity to participate in the offer on similar terms.
Rights issues in Australia had historically been considered a less attractive form of raising capital because of the requirement to produce a detailed prospectus. However, in June 2007 the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 (Cth) came into effect to allow ASX-listed companies and managed investment schemes to raise additional equity via a rights issue by lodging a ‘rights issue cleansing notice’ with ASX – without the need to lodge a prospectus or product disclosure statement. This regulatory reform meant that during the GFC, Australia’s capital raising framework assisted companies to be able to replace debt financing and shore up balance sheets swiftly and efficiently at a time of volatility and uncertainty. Non-prospectus accelerated rights issues have since become common practice in the market.
Similarily, ASIC’s introduction in June 2009 of a new Class Order increasing the amount a company could raise from an individual investor under a share purchase plan from $5,000 to $15,000 meant that share purchase plans were a more attractive capital raising method for entities, in particular alongside a rapid institutional placement. This monetary cap was increased again last year to $30,000 and share purchase plan’s may therefore become an increasingly useful capital raising option for companies during these challenging times.
It is said that Australia had strong macroeconomic fundamentals going into the GFC, a strong fiscal stimulus and monetary policy responses, and a robust financial sector. Our actual experience of equity capital raising by listed entities in Australia during the GFC was that the opportunities remained despite the market volatility. It was a very busy time for the capital markets. ASX reports that during 2009, over half of all ASX listed companies raised some equity capital totaling in aggregate $98.6 billion.
Australia’s capital raising regime helped Australian companies strengthen their balance sheets and survive the uncertainty of the GFC and this regime is still there to assist companies through these current difficult times.
If raising equity capital is not available to strengthen a balance sheet or is seen as excessively dilute in the current climate, there are now active credit markets that may be available. Since the GFC, there has been a significant increase in the amount of capital available to be deployed by credit funds. This capital is more expensive than bank debt, but where bank debt is not available, it is typically less dilute than equity capital.
We also note that our capital market team works seamlessly with our restructuring team to ensure that directors are well advised and protected at all times (including during a capital raise). If you would like to discuss the contents of this article, please contact Patricia Paton.