Rule #1 for raising money in a crisis: go hard, go early
A wave of capital raisings are coming but the pandemic-created crisis means a whole new set of rules for companies wanting to tap investors for cash.
It’ll be critical to get in ahead of the wave and raise money before investors have been tapped out, says KPMG law and equity capital markets partner Hoda Nahlous.
And for some companies it’ll be just as critical to aim for a much higher total than they think they need, if they aren’t sure how much investors will be willing to tip in.
“As a range of entities come to the conclusion that raising equity is necessary, we suspect you will not want to be at the backend of the wave,” Nahlous says.
“It will likely be congested and investors get ‘deal fatigued’. There is also the risk that the appetite of sub-underwriters dries up, which occurred in the back end of 2018.
“Boards should be conscious that while the rush to banks is happening now, the rush to the equity market will come later, with a few exceptions.”
Nahlous says market volatility is likely to continue for the foreseeable future and windows to tap the market will be short. Boards that are prepared will be able to take advantage of these small windows.
Companies need to be thinking in terms of a crisis that could last 12-18 months.
Nahlous says boards may consider their debt levels fine today and some have been “rigorous” about enforcing a ceiling of 2x net debt to EBITDA (earnings before interest, tax, deprivation and amortisation).
But if EBITDA slides as the crisis deepens, what is suitable now may not be in future.
Companies are withdrawing earnings guidance across the ASX and the ones that can are promising investors they have enough cash for the moment.
But ASX small caps are already beginning to scramble for cash as stretched budgets going into this pandemic require feeding, and later as the impact of travel bans, restrictions on non-essential services and on the size of gatherings bite.
But they are doing so in a market that is down 38 per cent from its all-time peak in February, and with share prices that have been hammered as markets reel from uncertainty in debt markets and the rising death toll from the COVID-19 pandemic.
“With so much volatility, it hardly seems like an attractive time to approach the equity markets. But if earnings continue to erode quickly you may well arrive at the conclusion that raising equity is the most appropriate course of action,” Nahlous says.
In these troubled times there are new factors to consider when raising money, she says.
Banks may be overwhelmed with requests so equity will need to replace debt to cover urgent spending.
There may be fewer underwriters willing to underwrite capital raises.
The size of the fee may mean a company can only afford to underwrite part of the cap raise.
One comforting thought for investors should be that much was learned from the global financial crisis and after.
Nahlous says corporate Australia is in a much better place financially than in 2008 and lessons from that period have been implemented, normalising a variety of ways of raising money quickly.
“Unlike in 2008, listed companies can avail themselves of various opportunities to raise
money from their shareholders and other investors,” she says.
“For example, accelerated entitlement offers (combined with, or without, an institutional placement) are a well-trodden path and raising capital through institutional placements and share purchase plans (SPP) is now more attractive given the SPP threshold recently doubled.”