'Cautious optimism' returns to fund raising

The global financial crisis has seen a huge amount of new money raised by New Zealand companies. Photo / Kenny Rodger

The global financial crisis has seen a huge amount of new money raised by New Zealand companies. But where to from here?

New Zealand companies have been on a rough ride in the past two years but many have raised capital and are starting to look outside their own businesses for opportunities again.

Last year close to $4 billion in new equity was raised by listed companies - nearly four times the $1.03 billion raised in 2008.

At the same time debt raisings grew from $2.08 billion to $3.35 billion. Some companies, like resins and paint maker Nuplex, Fisher and Paykel Appliances and agriculture services provider PGG Wrightson came close to disaster and could have been wiped out if they had not found new investors to plough in equity and raised money from existing shareholders. Others, like Fletcher Building and Sky City, raised money to reduce debt levels to shore up their balance sheets just in case the situation got worse.

Martin Wight, head of Macquarie Capital Advisers, says the end of 2008 presented pretty extraordinary times. "A number of corporates around the world found themselves in a position where the world had changed dramatically: access to new debt had ceased and debt refinancings were becoming a key issue. At the same time companies were faced with falling asset values and share prices and there was a need to recapitalise quickly."

Wight says the issue started to arise in Australia in the last quarter of calendar 2008 and in early 2009 and a number of equity raisings had been undertaken there before it spread to New Zealand.

Market analysts began to look much more closely at the gearing position of corporates and the possibility of banking covenant breaches. Some companies needed to come to market to raise capital and shore up their balance sheets.

Other capital raisings, like Fletcher Building's, were undertaken from a proactive point of view, Wight says.

Philip King, general manager investor relations at Fletcher Building, which raised $526.5 million last year in the largest equity raising by a New Zealand listed company, says equity markets have been very supportive of companies.

"In a strange way the global financial crisis has seen equity investors really step up and put money into companies and recapitalise them."

King describes last year's equity raisings as a great wave: "There was a huge amount of new money raised."

But he doesn't expect to see much more equity raised this year. "Most businesses that have survived are in a sound financial shape."

King believes equity raisings were a good experience for investors as many had got in at a low point of the share price and had seen it take off since.

"Even Nuplex shareholders who stayed the course did well."

Most companies had balance sheets that were now quite conservative.

King says it was lucky New Zealand's banks had remained so strong through the global financial crisis, but the secondary finance sector had been hit hard. "We have had 41 secondary finance organisations fail - that is a systematic shrinking. Where do you go? The trading banks... they don't have a huge appetite for more."

He says Fletcher Building worked closely with property developers and the big question at the moment was where they were getting funding from.

"The reality is there is not much commercial property development happening - partly, that is, because there is not enough demand, but partly because there is not enough funding."

John Dakin, the chief executive of Goodman Property Trust - one of the most active developers in the listed property trust sector - says he had noticed a fall away in competition since the credit crisis.

"That is a positive from our point of view." But gone are the days when 100 per cent of a development could be funded by debt.

"There has to be more equity in those properties. Where does that come from? It has to come from private high net worth individuals or a syndicated approach. The banks are going to want to see real equity in there."

Dakin says good quality projects with good tenants will still get funding but those on the margins without a clear exit won't get money.

"The market will work rationally. There will be a distinction between good and poor quality which is what we lost during the height of the boom."

Dakin says there is no doubt there had been a re-pricing of risk.

"All businesses have been through that and banks have been through that. From that point of view there has been more scrutiny."

He says credit is now freer but it is not back to where it was before the crisis.

Concerns over the sovereign debt crisis in Europe had also had an effect.

"We haven't refinanced this year, although we have tested the market. Liquidity is improving but it is certainly nowhere near what it was like in 2006/07."

Stefan Dechamps, general manager treasury for dairy co-operative Fonterra - which has to tap international markets for its funding - says the company is finding it easier to raise money now but he is aware that a number of smaller companies are still finding it tough. "The price is still higher and the availability is not as good. There are funds available but it's a bit more difficult getting access. It's a lot more volatile."

Dechamps says funding could dry up without notice.

The outlook for the year is still one of difficulty and there were risks that things could get worse: if that happens the market could see more risk aversion again.

Dechamps says bank scrutiny has significantly tightened up. "They are looking at the financials much more closely. If companies are close to breaching their covenants they are talking to them much more quickly. For us it hasn't changed that much."

Since the crisis ended, banks have had more capital but are being much more careful about who they lent to, he says.

Dechamps says if nothing more happens to upset the markets internationally he expects the situation to get better slowly.

"But it is very easy to think of something else that could make it hard again."

ANZ's managing director of commercial Graham Turley says there is no doubt that demand from businesses to borrow money is now "substantially less" than prior to the crisis.

"The whole environment has changed, the level of confidence is extremely low. The number of requests we have for new facilities is way down and investment confidence hasn't returned."

Turley says the ANZ has not changed its lending policies during the crisis: what has changed is the business environment, which has led to the bank to ask more questions about businesses and their plans.

"Before the GFC, revenues were going up, now some are going up and some down." Both revenue and asset values have taken a hit, which has had an impact on the security of a business.

"We have not changed lending criteria but we are a little bit more cautious on future forecasting because asset values have dropped."

Turley says banks have always scrutinised businesses they lent to and banking covenants just serve as a system trigger.

"What has happened as a result of performance not being as strong, asset values falling and having less cashflow... they have got close to covenants - but they are just a trigger for us to sit down and talk with the company.

"Banks are being more diligent but the uptake and increase in companies triggering covenants is down to the economy."

Turley says once confidence in revenue forecasts picks up again and asset values begin to go up, loan value confidence will also improve.

"I do get a sense out there that people have more cautious optimism."

He says confidence will need to return before people began thinking about how to grow rather than thinking what sort of immediate action needs to be taken, he said.