The coronavirus pandemic has required directors to navigate extreme market volatility, weakened financial markets and an uncertain business outlook. An increasing number of ASX-listed entities have had to re-evaluate their liquidity positions, with many raising capital to firm-up their balance sheets to weather the COVID-19 storm.
It has now been close to two months since the Australian Securities Exchange (ASX) announced temporary measures to assist listed entities raise capital. As the Prime Minister has indicated that the economy will now cautiously begin the slow road to recovery, we thought it was timely to reflect on the market’s response to the measures, look at the manner in which they have been adopted and make some predictions for the future.
Overview of the capital raising relief
On 31 March 2020, ASX introduced temporary emergency capital raising measures. These were designed, in part, to facilitate capital raisings for ASX-listed entities who, as a result of the economic disruption caused by COVID-19, may have an urgent need to raise capital to support their operations and manage cash flow constraints.
The measures were implemented by way of two class order waivers, which the ASX updated on 22 April to clarify certain matters and improve their overall operation. By way of reminder, the key measures implemented by ASX are as follows:
- Increase in placement capacity from 15 per cent to 25 per cent: The increased placement capacity may be accessed where an issuer undertakes a follow-on accelerated pro-rata entitlement offer, standard rights issue or share purchase plan (SPP) offer (Extra Placement Capacity). The intention behind this relief is to allow entities to raise a greater amount of capital whilst ensuring that all shareholders can participate, diminishing the dilutive impact. ASIC has also introduced accompanying relief which allows entities to proceed with ‘low doc’ entitlement offers, placements and SPPs despite not satisfying all of the usual requirements under the Corporations Act.1 The Extra Placement Capacity can only be utilised once and the issue must be for fully paid ordinary securities. Entities who have access to the extra 10 per cent capacity under Listing Rule 7.1A may elect to rely on that or the Extra Placement Capacity. Entities must also provide ASIC and ASX with an allocation spreadsheet (which will not be released to the market) showing full details of participants in the placement and the number of shares allocated to them.
- Waiver of the one-for-one cap on non-renounceable entitlement offers: Listing Rule 7.11.3 restricts the ratio of securities for non-renounceable entitlement offers to no greater than one security for each security held. ASX’s temporary relief now allows entities to choose a greater ratio for non-renounceable entitlement offers in order to meet their capital raising needs so long as it is fair and reasonable in the circumstances.
- Back-to-back trading halts: ASX will permit an entity to request back-to-back trading halts of two days each, providing the entity with a halt for up to four trading days. This is intended to allow an entity additional time and flexibility to consider, plan for and implement a capital raising without needing to suspend trading in its securities which may have adverse consequences (for instance, on an entity’s ability to issue a cleansing notice). An entity seeking two consecutive trading halts must make that clear in its request for a trading halt under Listing Rule 17.1.
ASX requires entities seeking to rely on the temporary relief measures to notify ASX in writing before doing so and to explain the circumstances of the capital raising and whether it is proposed to be undertaken in response to COVID-19. That notification will not be released to the market.
How has the market responded to the ASX relief?
Since ASX introduced its relief there have been approximately 50 capital raisings conducted on ASX seeking to raise $10 million or more, with close to $16 billion raised in aggregate.2 Perhaps surprisingly, only 17 (34 per cent) of those raisings relied on some aspect of the ASX relief.
Of the 50, 19 have raised less than $50 million; 25 have raised between $50 million and $1 billion and 6 have raised more than $1 billion.
We set out additional findings in relation to these raisings below:
- Placement and SPP most popular structure: The most common COVID-19 capital raising structure has been an institutional placement combined with a SPP (54 per cent). Of the SPPs completed: shareholders have not been taking up their full allotment with an average participation of 33 per cent; and 85 per cent of SPPs which capped the amount of funds to be raised were oversubscribed and subject to scale back arrangements. Since ASIC doubled the SPP participation limit in 2019 from $15,000 to $30,000 per securityholder, we expect most entities would consider that provides retail shareholders with an adequate (and sizeable) opportunity to participate.
- Placement and ANREO also common: The second most common structure to raise capital has been an institutional placement combined with an accelerated, non-renounceable entitlement offer (ANREO) (22 per cent). On average, the retail component of the ANREO had a 59 per cent participation rate. Ten entities have conducted placements for professional and sophisticated investors only, not relying on the relief and with no ability for retail participation. Two entities have conducted ANREOs only.
- The temporary Extra Placement Capacity has been used: Of the 48 capital raisings that involved placements, a quarter took advantage of the new Extra Placement Capacity. Of those, the majority were larger raisings, each raising more than $50 million. Entities which relied on the Extra Placement Capacity also offered considerable discounts to investors who participated in the placement. The average stated discount to the last closing price on these placements has been close to 30 per cent, compared to the average discount for placements not relying on the extra capacity which is closer to 12 per cent.
- Low reliance on the waiver of the one-for-one cap: Only two companies have utilised the waiver of the one for one cap pursuant to Listing Rule 126.96.36.199 Note a number of entities raising less than $10 million have relied on the waiver.
- Low reliance on back-to-back trading halts: Only seven entities requested back-to-back trading halts to consider, plan for and implement their capital raising. We expect the use of this temporary measure to be popular amongst small and mid-cap entities seeking to raise less than $10 million, which falls outside our dataset for the purposes of this analysis.
- Purpose of the capital raising: the most common reasons cited for conducting a capital raising include a need to strengthen the balance sheet, to provide working capital flexibility or to facilitate a recapitalisation by refinancing debt (60 per cent). Many companies which have conducted COVID-19 raisings fall within the consumer discretionary sector, highlighting the impact of the lockdown restrictions and social distancing measures on supply chains and revenue streams for businesses in this sector. Companies in the software and services sector have a more bullish outlook in the short to medium term. Of the eight capital raisings undertaken by companies in that sector, seven cited continued investment in growth agendas, pursuit of acquisition opportunities and further acceleration of sales as reasons for conducting their raising. We expect that as technology continues to play a more significant role in a post-COVID-19 environment, companies in the software and services sector will seek to capitalise on new opportunities that have been created by the crisis and deploy equity to support growth initiatives.
What can we learn from the relief?
While the initial take-up of the relief for raisings of more than $10 million has been surprisingly limited, the fact that even a few companies have been able to more effectively raise capital suggests the swift implementation of the temporary relief measures has had the desired effect.
ASX is to be commended for its proactive response to COVID-19 and its preparedness to support listed entities which need to raise capital to support their business during difficult and volatile market conditions.
The temporary relief measures have not, however, received universal support. The increase in placement capacity has raised concerns that institutional investors will receive preferential treatment to the detriment, and dilution, of retail shareholders. While ASX has sought to minimise the dilutive impact in its relief, there are a number of entities that have bypassed the relief altogether and opted for placements only, which does not service their retail shareholder base.
ASX has recently introduced additional reporting obligations for entities seeking to rely on the Extra Placement Capacity which requires these entities to report the approach taken to identify investors and determine shareholder allocations and use best endeavours to allocate pro-rata to existing shareholders. Only two capital raisings (greater than $10 million) have been conducted in reliance on the Extra Placement Capacity since the new measures came into effect on 23 April. We expect that the additional obligations may deter entities from relying on the Extra Placement Capacity or otherwise reduce the number of entities that ultimately take advantage of the relief.
The relief measures have a scheduled expiry date of 31 July 2020. Given the Government’s desire to safely return the Australian economy to its feet, we would be surprised if the relief is extended beyond its term. We will watch with interest to see if the proportion of entities relying on relief in connection with their equity capital raisings increases in the coming months.