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July 27, 2020
A big year for equity capital raisings on the ASX
A temporary easing in rules around equity capital raisings has helped a surge in activity and this is expected to continue as companies shore up their balance sheets.
Equity capital raisings have been a major focus for corporate Australia in the first half of 2020, as companies looked to shore up their balance sheets as a direct response to COVID-19. With guidance being retracted, earnings facing sharp declines and dividends being cut, it quickly became apparent that fresh equity capital was required across the market.
There are four main ways for companies to raise equity capital on the ASX:
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- via an initial public offering (IPO);
- via an Entitlement Offer, also known as a Rights Offer/Issue;
- via an institutional Placement (and sometimes in conjunction with a shareholder purchase plan, or SPP, for retail investors); and
- via a dividend reinvestment plan (DRP). Each structure has its pros and cons, which are discussed below. However during times of market volatility and uncertainty, Entitlement Offers and Placements are preferred.
*Note: ASX listing rule 7.1 has temporarily been lifted from 15% to 25% of issued capital.
Historic trends
Figure 1 below presents a breakdown of all equity capital raisings on the ASX (excluding SPPs and DRPs) from 2006 through to 30 June 2020.
This data provides some interesting trends. During times of high uncertainty and market volatility, IPO activity is close to zero whereas placements are more prevalent. Rights issues tend to be event-driven as a direct response to M&A (such as Transurban’s acquisition of WestConnex in 2018), company specific issues (recapitalising balance sheets post the GFC in 2008/2009) or regulatory changes (such as banks recapitalising in anticipation of regulatory capital changes in 2015).
Figure 2 below provides a good visual summary of the number, value and average deal size of each type of equity raising.
Placements are the most frequent form, but also raise the smallest amount of capital per deal. Placements can be executed quickly (normally within 24 hours) and are targeted at institutional investors. They are often also underwritten, providing certainty to issuers. Entitlement Offers/Rights issues are less frequent but raise almost double the amount of placements on average. All investors are treated in the same way, and receive a pro rata allocation. However, while there is no cap on the amount raised, they take longer to execute.
IPOs are the least frequent, but on average raise over double the amount of capital versus a placement. IPOs are highly sensitive to market conditions and the individual circumstances of the company.
2020 trends
The first half of 2020 was a very active period. When reviewing the data, it is clear that corporate Australia reacted more quickly than the rest of the world to the impacts of COVID-19 by raising capital to strengthen balance sheets. According to the Australian Investor Relations Association, Australia typically runs at 3-5% of global issuance. In the first weeks of the pandemic, Australia was running at 15-20% of global issuance¹.
In the first half of 2020, Corporate Australia has raised over two-thirds of the equity raised in all of 2019. The 10 largest ECM raisings have all been placements and five have taken advantage of the temporary increase in placement capacity from 15% to 25% of issued capital allowed by the ASX, as shown in Figure 3.
While capital raisings have occurred across all sectors, there was a much heavier focus on consumer discretionary companies due to uncertainty of earnings and cash flows.
The outlook for equity capital raising activity
For the rest of 2020, the outlook for capital raisings is driven by a number of key factors:
1) The continued uncertainty of COVID-19 will result in further equity raisings
The economic impact of changes to the “Job Keeper” support package and adjustments to the major banks’ loan deferral program is difficult to quantify. However, it is clear that further economic shocks could prompt companies to raise more equity capital. Placements and entitlement offers/rights issues will be the primary mechanism.
2) Investor demand
With interest rates expected to remain “lower for longer”, investors will continue to seek opportunities for assets and companies with attractive growth prospects and cash flow generation, ultimately driving higher equity values and P/E multiples.
3) Information technology and healthcare remains in focus
A shift in working practice, increased cybersecurity risk, increased information flow and greater health awareness is expected to drive S&P/ASX 200 Information Technology Sector (^XIJ) and S&P/ASX 200 Health Care Sector (^XHJ) indices, which are already trading at historically high forward P/E ratios.
4) Private Equity to capitalise on opportunities
Having recently undertaken a series of fundraising rounds, PE firms have a record amount of dry powder to deploy as they seek opportunities to unlock value and drive merger & acquisition activity.
Conclusion
As we head into the second half of 2020, it is expected that Placements, Entitlement Offers and Share Purchase Plans will continue to feature prominently as companies strengthen their balance sheets to navigate through the uncertainty created by COVID-19.
Heightened execution risk and volatile equity markets will mean that IPO activity will remain relatively low. Nonetheless, as equity markets stabilise, NAB expects a large pipeline of companies to list, particularly those backed by financial sponsors as they look to assess exit opportunities.
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