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One of the big lessons of the GFC was that investing in hurriedly arranged capital raisings was a very profitable strategy for retail investors. Many companies raised capital, including majors such at the Commonwealth Bank. Its raising in December 2008 at $26 a share was one of the best to participate in – it was about $3 lower than the low for the stock on the ASX.
The Coronavirus pandemic in 2020 is causing another tsunami of capital raisings. Already, 15 ASX 200 companies have come to the market seeking in each case to raise between $200m and $1,200m. There have also been more than a dozen raisings for smaller companies.
The table below shows the major raisings with companies arranged by sector, and then broken into the amount sort from institutional investors and the amount sort from retail investors.
Unsurprisingly, companies most exposed to discretionary spending are leading the way, with 7 out of the 15 companies coming from the consumer discretionary sector. Industrials, health care, energy, financials, information technology and property trusts are also represented.
Typically, the raisings are underwritten and conducted at an 8% to 20% discount to the last traded ASX price and a smaller discount to what is described as the TERP (theoretical ex-rights price). Two formats are used – an accelerated pro-rata non-renounceable entitlement offer (APNEO), or a placement with accompanying share purchase plan (SPP) for retail investors. In both cases, institutional investors get to go first.
This is arguably the fairest structure for shareholders. The offer is made on an entitlement basis in accordance with each shareholders’ current holding. Webjet has a 1:1 entitlement (meaning that for you can purchase 1 new share for every 1 share held), while Flight Centre is raising capital on a 1:1.74 ratio (you can purchase 1 new share for every 1.74 shares held or 100 for 174).
The offer is made at a fixed price and institutions get to go first (which always occurs whilst the stock is in a trading halt). Those entitlements that aren’t taken up are typically auctioned to other institutional investors.
The stock comes out of the trading halt and then retail investors get their chance to invest. Same fixed offer price, same entitlement ratio, but with a two to three-week settlement period.
Entitlements are typically non-renounceable, meaning that you can’t sell the entitlement on the ASX or transfer it to another party. Either you take it up (in full or part) and buy the new shares, or you don’t.
Variants of the offer are entitlements are renounceable, or the institutional entitlement is accompanied by a separate institutional placement. For example, Flight Centre raised $280m through an institutional entitlement and $282m through an institutional placement. An oversubscription facility may also be available, allowing retail investors to subscribe for more than their entitlement.
Less favourable to retail investors because they run the risk of being diluted, the other common format is an institutional placement first, followed by a subsequent share purchase plan to retail investors.
Like the APNEO above, the placement to institutional investors is underwritten and made at a fixed price during an ASX trading halt. Sometimes, a book-build process is used to set the price.
The share purchase plan is a format that has been approved by the ASX. Rules include:
Some companies give investors market protection over the offer period. They track the ASX trading price and if the company’s price falls, the offer price is reduced. It becomes the lesser of:
The problem with SPPs is that if there isn’t much stock available and it is in hot demand, retail shareholders can be badly diluted. Cochlear’s raising is an example where retail shareholders have been dudded. It raised $880m from institutional investors at $140 per share (now trading around $188 per share), yet only $50m is available to retail shareholders. They must apply by Thursday to participate in the SPP. A small upside is the market protection provided over the offer period – arguably, retail investors are given a “free” option.
You need to be a shareholder to participate and the ‘ex’ date will be the day it goes into the trading halt. This means that you had to be a shareholder before the raising is conducted.
But you can almost see these raisings coming. The “market” is particularly good at getting companies to raise capital in times of crisis and is highly incentivised to make this happen.
Keep some cash spare. The chances are that there will be several opportunities to invest in capital raisings during this crisis.