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COMMENT:
In our experience, the closer the raising is to the issuer's last results announcement the quicker the process will be.
In the time of Covid-19, investors want to understand the impact of the pandemic on an issuer's business and strategy.
In the past four months Chapman Tripp acted on 13 capital raisings by NZX listed issuers, to raise more than $2.6 billion in equity. This level of capital raising activity over such a concentrated period in New Zealand is unprecedented. It taught everyone involved in capital markets a great deal. Leaving aside the lessons learned in Zoom etiquette and coping with the end of "the weekend" as a concept during this time, here are my top tips for issuers raising capital in the current environment.
1. Size matters
The amount of capital that needs to be raised to assure investors that the issuer will be sufficiently capitalised for the short to medium term (usually the current and next reporting period), is one of the most important considerations in a capital raising. To assist in getting the size right an independent advisor was engaged to conduct a "sufficiency analysis" review on half of the capital raisings we assisted on. This entails interrogating assumptions underpinning the issuer's forecast scenarios to provide an independent view of how much capital is needed to meet the issuer's needs. We expect issuers raising for recapitalisation purposes to continue to exercise this level of diligence while the impact of Covid-19 on their business remains inherently uncertain.
2. Go once, go early
Investor engagement is crucial to the success of any capital raising. It is common practice to "wall-cross" institutional investors just before launch to seek feedback on pricing, structure and size, as well as likely indications of demand. In at least five of the capital raisings we advised on, the feedback resulted in the issuer upsizing the capital raise. Investors prefer issuers to "go once and go early", so while sufficiency analysis is important to right sizing a capital raise, issuers should keep an open mind on size until investor feedback is obtained.
3. Balancing fairness and certainty
With any capital raising, there is a trade-off between fairness to existing shareholders and certainty to the issuer that the amount sought will in fact be raised. A preference for certainty in the current environment has resulted in most capital raisings during the Covid-19 pandemic being structured as a placement and share purchase plan (SPP) or a placement and accelerated non-renounceable entitlement offer (ANREO), rather than as a pro rata renounceable rights offer.
Raisings we have assisted on have demonstrated that these structures can be adapted to allow greater fairness to existing shareholders, while ensuring certainty for the issuer. For example, Z Energy's $350 million placement and SPP conducted the placement on an "open bookbuild" basis to minimise dilution by allowing retail participation through broker bids, while the $207m placement and ANREO by Kathmandu (the first of its kind in New Zealand) provided an uncapped oversubscription facility to eligible retail investors to avoid dilution. Issuers shouldn't be afraid to push their advisors to design a raising structure that achieves a balance of fairness and certainty.
4.Speed of execution
Speed of execution matters when markets are unpredictable. Capital raisings can be undertaken by NZX listed issuers very efficiently, with required disclosure limited to cleansing the market of all material information. That sounds simple, but there is still a mountain of work to be done by advisors and the issuer to bring a raising to market. In our experience, the closer the raising is to the issuer's last results announcement the quicker the process will be (there likely being less material information to cleanse).
Of the raisings we were involved in the shortest time-frame from the first Due Diligence Committee meeting to offer launch was just six days (a new record for us). The key to achieving speedy execution without compromising the integrity of the process is ensuring that the senior management and directors involved are available and able to focus on the raising for a short but concentrated period of time. This sometimes means clearing the decks of other commitments and choosing board representatives with prior capital raising experience.
5. Articulate your risks
Practice in New Zealand has been to disclose risks specifically relevant to a capital raise rather than to disclose a laundry list of "business as usual" risks for investors. That makes good sense to us. The issuer is already listed and investors can avail themselves of this information by way of the issuer's periodic reporting and continuous disclosure announcements.
This is one area where we are doing much better than our Australian peers, where risk disclosure for capital raisings is a "cover oneself" exercise thanks to an increasingly litigious environment for listed issuers. This has resulted in lengthy disclosures that may in fact obfuscate what's really worth saying — see the investor presentation for the NAB capital raising in Australia where half of its 52 pages were risk disclosures. In the time of Covid-19, investors want to understand the impact of the pandemic on an issuer's business and strategy. Focused risk disclosures might be harder to write, but thinking about and articulating risk in this way is more use to both issuers and investors. Issuers should be wary of Australian advisors who want to take a kitchen sink approach simply because that's how it's done across the ditch.
6.Engage your regulators
New Zealand regulators have shown a strong willingness to engage with issuers and to provide relief to facilitate capital raisings that for some issuers have been essential to their continued existence. NZX moved swiftly to provide Covid-19 related relief to increase capital raising capacity and to permit ANREOs.
NZX provided further relief to Z Energy, Sky TV and Investore to permit their capital raisings to exceed relevant limits. Where an issuer is able to clearly articulate that the relief sought is consistent with the policy of the regulator, novel approaches that may be required to successfully complete a capital raising can be accommodated.
The Takeovers Panel and the Overseas Investment Office have also respectively provided unprecedented relief and moved swiftly to provide consents for recent urgent capital raisings.
- Rachel Dunne is a partner at Chapman Tripp.
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