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With market volatility continuing to be driven by the economic and social upheaval caused by COVID-19, the number of entities that are finding themselves with a need to raise capital is ever increasing. All entities that rely on revenue/earnings for cash flow over the next 6 to 9 months will need to consider raising debt or equity capital.
In our recent article Raising Capital in uncertain times, we considered at a high level the options that were previously available to listed entities that may find themselves particularly impacted by these difficult times. We queried whether the investor market would be supportive of capital raisings in the same way they were during the GFC, and discussed some of the legislative and regulatory reforms that were introduced shortly before and during the GFC that assisted entities to replace debt financing and shore up balance sheets swiftly and efficiently at a time of volatility and uncertainty.
Despite this, with effect from today, ASIC and ASX have seen it necessary to supplement the existing regulatory regime with new temporary measures which are intended to further facilitate rapid capital raisings during COVID-19. These new measures are outlined below.
ASIC has given temporary relief to enable ‘low doc’ offers (i.e. non-prospectus offers) including rights issues, placements and share purchase plans (SPP’s) to be made to investors, even where the entity does not meet all the normal requirements for issuing a cleansing notice. This temporary relief allows a listed entity to undertake a ‘low doc’ offer where it has been suspended from the ASX for a total of up to 10 days in the last 12 month period. The previous requirement was that an entity intending to undertake such an offer could not have been suspended for more than five days in the last 12 months.
With the benefit of the new relief, entities that otherwise satisfy the cleansing notice requirements will be able to undertake a ‘low doc’ offer:
even if they have been suspended for up to 10 days in the 12 months before the offer; and
provided they were not suspended for more than five days in the period commencing 12 months before the offer and ending 19 March 2020 (nb. 19 March was when the Federal Government changed its travel advice to the most severe Level 4 warning: 'do not travel' overseas).
Over the last couple of weeks we have observed an increasing number of entities going into voluntary suspension as they endeavor to understand the impact of COVID-19 on their business operations. Other entities in the process of undertaking capital raisings during these uncertain times have needed to move from trading halt into voluntary suspension to allow them more time to execute the relevant capital raising, and even then have had difficulties executing the capital raising without remaining in suspension for more than 5 days. The effect of a longer suspension being that they can no longer undertake a ‘low doc’ offer, but would instead be required to prepare a prospectus. We therefore expect a number of market participants will welcome the additional time afforded by this measure.
In its ASX Compliance Update released on 31 March 2020, ASX provided some helpful reminders and practical guidance for listed entities grappling with their continuous disclosure obligations in the current environment.
In addition, like ASIC, ASX has introduced temporary emergency capital raising relief to help facilitate capital raisings in the short term. The relief has been implemented by way of class order waivers which will expire on 31 July 2020, unless ASX otherwise decides to remove or extend them. The new temporary measures are as follows:
Back-to-back trading halts – ASX is now permitting an entity to request two consecutive trading halts, totaling 4 trading days, to assist entities execute a capital raising. If the capital raising cannot be executed within that timeframe, an entity can request voluntary suspension which can now be for a period of 10 days without limiting the ability of an entity to raise capital through a ‘low doc’ offer (see ASIC’s new measures noted above).
An increase in the 15% placement capacity to 25% - ASX will lift the size of a potential placement in any 12 month period from 15% to 25% (Temporary Extra Placement Capacity) subject to the entity undertaking the placement in conjunction with a pro rata entitlement offer or a SPP – in each case at the same or lower price than the placement price. The normal ‘supersize’ waiver is also included in the class order waiver. A 25% placement capacity is already available to entities that fall outside the ASX 300 and have a market cap equal to or less than $300m, and sought shareholder approval to increase their placement capacity at their AGM under ASX Listing Rule 7.1A. Entities that are already eligible to use this additional placement capacity will be able to use their additional placement capacity or the Temporary Extra Placement Capacity (but not both). ASX has noted that this is a one-off measure that can only be used for one placement and entities cannot replenish or ratify the placement under the listing rules. In addition, ASX is waiving the usual SPP restrictions around SPP price and number of securities that may be issued under the SPP, and instead will simply require that the follow on SPP occurs at a price equal to or lower than the placement price. Further, if an SPP is undertaken without a placement, ASX is waiving the pricing restrictions usually set out in the ASX Listing Rules and allowing the SPP to be undertaken at any price determined by the board.
Non-renounceable entitlement offer ratios – ASX is waiving the one-for-one cap on non-renounceable entitlement offers and instead listed entities are expected to choose a ratio for their non-renounceable entitlement offer that meets their capital raising needs and that is fair and reasonable in the circumstances.
Many entities that will consider taking advantage of these measures are likely under funding pressure coupled with the need to raise capital rapidly to survive. However, in structuring their capital raisings, entities must remember their obligations to consider fairness between shareholders – both institutional and retail – and structure offers where possible to help achieve fairness. This requires directors to balance a range of considerations, such as the need for quick and certain capital, and the cost to and possible dilution of existing securityholders – an important reminder highlighted by both ASIC and ASX in their market releases.
The Temporary Extra Placement Capacity may also facilitate private equity or other private capital investment in listed company shares by way of structured PIPES transactions. PIPES transactions are often structured as convertible notes and raising the placement capacity will permit private capital to take a larger strategic stake in the listed company. Investing by way of convertible notes for a significant minority position, because of the downside protection offered by the note, may be a more popular investment instrument in time of such marked volatility.
By including a condition that placements utilising the Temporary Extra Placement Capacity must be undertaken in conjunction with a capital raising that is made available to retail investors, ASX is ensuring retail security holders have an opportunity to participate in the offer at the same or a lower price to institutional investors. However we expect retail investor appetite to participate in offers at this point in time may be low, and will likely be low for an extended period of time, so the practical effect is likely to be an even more dilutionary impact for retail investors, raising questions as to whether these temporary measures to facilitate capital raisings, in particular the increase to the placement capacity, treat retail investors fairly. Boards will need to take care to consider properly and document properly the process by which it is decided to take advantage of the increase in placement capacity, given the potential for adverse effect on minority shareholders.
Nevertheless we expect the temporary measures will have the desired effect – to help facilitate capital raisings - however this may be tempered by the tightening of the FIRB restrictions which we explain in Putting the brakes on foreign investment – zero tolerance from FIRB.
If you are 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.
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.