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Preparing for a wave of capital raisings

One of the lessons of the GFC was that investing in hurriedly arranged capital raisings was a very profitable strategy for retail investors.

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 Covid-19 pandemic in 2020 is causing another tsunami of capital raisings. Already, 22 ASX 200 companies have come to the market seeking in each case to raise between $200m and $3,500m. There has also been more than a score of 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.

 

Capital Raisings by ASX 200 Companies since Covid-19

 

Institutional

Retail

 

Amount

Price

Type

Amount

Price

Cap

Close

Cons Disc

 

 

 

 

 

 

 

Bapcor

$180m

$4.40

SPP

$30m

$4.40²

$30,000

15 May

Flight Centre

$562m

$7.20

APNEO

$138m

$7.20

1:1.74³

Closed

G8 Edu

$227m

$0.80

APNEO

$74m

$0.80

1:2.2³

Closed

IDP Edu

$225m

$10.65

SPP

$15m

$10.65¹

$30,000

Closed

Invocare

$200m

$10.40

SPP

$50m

$10.40²

$30,000

13 May

Kathmandu

NZ$154m

$0.49

APNEO

N$53m

$0.49

1.2:1

Closed

Webjet

$231m

$1.70

APNEO

$115m

$1.70

1:1

Closed

 

 

 

 

 

 

 

 

Con Staples

 

 

 

 

 

 

 

Metcash

$300m

$2.80

SPP

$30m

$2.80¹

$30,000

15 May

 

 

 

 

 

 

 

 

Energy

 

 

 

 

 

 

 

Oil Search

$1,080m

$2.10

APNEO

$80m

$2.10

1:8³

Closed

 

 

 

 

 

 

 

 

Financials

 

 

 

 

 

 

 

NAB

$3,000m

$14.15

SPP

$500m

$14.15¹

$30,000

22 May

QBE

US$750m

$8.25

SPP

US$75m

$8.25¹

$30,000

11 May

 

 

 

 

 

 

 

 

Health Care

 

 

 

 

 

 

 

Cochlear

$880m

$140.00

SPP

$220mt⁵

$140.00¹

$30,000

Closed

Ramsay

$1,200m

$56.00

SPP

$200m

$56.00¹

$30,000

20 May

 

 

 

 

 

 

 

 

IT

 

 

 

 

 

 

 

NextDC

$672m

$7.80

SPP

No cap

$7.80¹

$30,000

Closed

 

 

 

 

 

 

 

 

Industrials

 

 

 

 

 

 

 

Auckland Apt

NZ$1,000m

NZ$4.66

SPP

NZ200m

NZ$4.66¹

$47,000

Closed

Qube

$264m

$1.95

APNEO

$234m

$1.95

1:6.35

21 May

Reece

$580m

$7.60

APNEO⁴

$20m

$7.60

3:55

Closed

 

 

 

 

 

 

 

 

Materials

 

 

 

 

 

 

 

Newcrest

$1,000m

$25.60

SPP

$100m

$25.60¹

$30,000

27 May

 

 

 

 

 

 

 

 

Real Estate

 

 

 

 

 

 

 

Centuria Ind

$130m

$2.62`

UPP

$10m

$2.62

$30,000

15 May

CH Retail

$275m

$2.90

UPP

$25m

$2.90

$30,000

20 May

Lend Lease

$950m

$9.80

SPP

$200m

$9.80²

$30,000

26 May

SCA Prop

$250m

$2.16

UPP

$50m

$2.16

$30,000

8 May

SPP = Share Purchase Plan; UPP = Unit Purchase Plan; APNEO = Accelerated Pro-Rata Non-Renounceable Entitlement Offer

 

¹ The lower of the placement price, or 2% discount to the 5 day VWAP up to the close date. AIA, MTS is 2.5% discount.

² The lower of the placement price, or 2% discount to 5 day VWAP up to the close date or 2% discount to the VWAP for the closing date

³ Oversubscription facility available

⁴ Also SPP
⁵ Originally $50m, upsized to $220m

 

Unsurprisingly, companies most exposed to discretionary spending are leading the way, with 7 out of the 22 companies coming from the consumer discretionary sector. The real estate sector has 4 raisings, industrials 3, with consumer staples, energy, health care, financials, information technology and materials 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.

 

Accelerated pro-rata non-renounceable entitlement offer (APNEO)

This is arguably the fairest structure for shareholders. The offer is made on an entitlement basis in accordance with each shareholders’ current holding. Webjet had a 1:1 entitlement (meaning that shareholders could  purchase 1 new share for every 1 share held), while  Flight Centre raised capital on a 1:1.74 ratio (shareholders could 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 cannot 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.

 

Placement and share purchase plan (SPP)

Less favourable to retail investors because they run the risk of being di-luted, 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:

  • The maximum amount available to any one shareholder is $30,000
  • Shareholders can apply in fixed dollar parcel values: $1,000,$2,500, $5,000, $7,500, $10,000, $12,500, $15,000, $20,000, $25,000 or $30,000
  • The offer price is fixed and can’t be higher than the price institutional investors paid
  • The company can set a cap on the number of shares available, meaning that if the SPP is oversubscribed, then applications can be scaled back and you may receive a lesser dollar value of shares than you applied for
  • Shareholders receive an offer booklet; and
  • Typically, a three week offer period.

 

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 original SPP fixed price
  • The average price of the company’s stock on the ASX in the five trading days leading up to the close of the SPP, less a 2% discount; and
  • (In some cases), the average price of the company’s stock on the ASX in the last trading day prior to the close of the SPP.

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, for example, initially said that only $50m would be available for retail shareholders under its SPP. It got swamped with offers and raised the amount to $220m. Even this wasn’t enough to meet demand ($417m), and a heavy scale-back was applied.

 

How can you participate

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.  Look for:

  • Companies share prices being aggressively sold down
  • Commentary/speculation in the financial press
  • Raisings by competitors (it is likely then to spread across the industry)
  • Companies with weaker balance sheets
  • Companies that face a revenue shortfall.

Keep some cash spare. The chances are that there will be several opportunities to invest in capital raisings during this crisis.

 


About the Author
Paul Rickard , Switzer Group

Paul Rickard is a co-founder of the Switzer Report. Paul has more than 30 years’ experience in financial services and banking, including 20 years with the Commonwealth Bank Group in senior leadership roles. Paul was the founding Managing Director and CEO of CommSec, and was named Australian ‘Stockbroker of the Year’ in 2005. In 2011, Paul teamed up with Peter Switzer and Maureen Jordan to launch the Switzer Report, a newsletter and website for share market investors. A regular commentator in the media, investment advisor and company director, he is also a Non-Executive Director of Tyro Payments Ltd and PEXA Group Limited.