While a lack of initial public offerings in recent years has led some to criticise the state of New Zealand's capital markets, new listings are not the only indicator that markets are functioning well.
Primary equity raisings by existing listed issuers, as well as secondary market trading, are also key factors.
Covid-19 has presented unique challenges and it is difficult to contemplate a set of circumstances representing a greater test of New Zealand's capital markets.
Companies saw an almost immediate decline in revenue – in several cases, revenue was reduced to zero for a period.
Taking an informed view on sufficiency in this environment was, and still is, increasingly challenging for boards and management. Hence companies have taken a very conservative view on the level of balance sheet liquidity they will require to see them through the next 24 months.
Early signs that our markets are functioning effectively have been positive – since the onset of the Covid-19 pandemic, NZX listed issuers have raised over $2.7 billion in equity capital.
Kathmandu was the first issuer to raise equity in response to the pandemic, announcing it would use a novel offer structure to raise over two-thirds of its market capitalisation.
The following week, Auckland Airport undertook the largest ever secondary capital raise in New Zealand's history. Vista Group, Augusta Capital, Z Energy, SKY TV, Infratil and SkyCity, among others, have since raised capital.
All of these offers were very well supported by existing shareholders and the broader market.
NZX was quick to engage with the market, issuing class waivers to permit additional flexibility in terms of how offers can be structured. Among other things, the class waivers permit an issuer to:
• undertake a placement of up to 25 per cent of its shares on issue over a rolling 12-month period (increased from 15 per cent);
• offer up to $50,000 worth of shares per shareholder under a share purchase plan (increased from $15,000); and
• undertake an accelerated non-renounceable entitlement offer (ANREO).
Other regulators, such as the Takeovers Panel and Overseas Investment Office, have also been doing what they can in this environment not to impede companies needing to raise capital – more evidence that our capital markets are working well.
Structuring options in uncertain and volatile markets
With heightened uncertainty and record levels of volatility, minimising transaction risk and maximising execution certainty are paramount considerations for any potential capital raising. Companies have therefore focused on two main types of offer structure in the current environment, these being:
• an underwritten placement to institutional investors, combined with a share purchase plan (SPP) targeting retail investors; or
• an ANREO, which may be combined with a placement to institutional investors.
The placement and SPP structure, which gained popularity over the course of 2019, is simpler than a traditional rights offer, and the placement can be executed quickly over a one-day period – providing certainty and reducing risk.
This structure was utilised by Auckland Airport for its $1.2b raise, as well as Z Energy, Infratil and SkyCity for their offers.
Key to the placement and SPP structure is that shares issued under the placement component can be allocated to existing investors on a largely pro rata basis (for example, in SkyCity's placement, shares were allocated pro rata and only to existing investors).
In addition, the SPP component allows nearly all retail investors to receive at least their pro rata proportion of the offer (assuming they apply for this amount).
Where a company needs to raise a significant portion of its market capitalisation, it is generally more appropriate to undertake a rights offer.
In the current environment, an ANREO, combined with a placement, has made the most sense in terms of maximising the up-front proceeds received by the company and ensuring underwriting and sub-underwriting support is available.
The key feature of an ANREO, when compared to other types of rights offer, is that it does not incorporate any shortfall bookbuild (the sale of entitlements not taken up, where any premium realised is returned to shareholders) – which has become a particularly common feature of New Zealand rights offers – or any rights trading.
While common in Australia, Kathmandu was the first issuer to undertake an ANREO in New Zealand. Although this type of offer structure is novel, it has since been utilised by other listed companies such as Vista Group, Augusta Capital and Sky TV.
As this initial wave of balance sheet recapitalisations comes to an end, issuers are likely to return to a structure that includes shortfall bookbuilds (in any event, the NZX waiver permitting use of the ANREO structure will expire at the end of October 2020).
This will be a positive for those shareholders who are unable to participate in a raise, as significant value has historically been achieved through shortfall bookbuilds – as an example, on average over the last five years, a non-participating shareholder with $10,000 worth of shares received ~$240 as a result of a shortfall bookbuild, with the average since 2018 being ~$340.
New Zealand's secondary markets also strong
Secondary market trading activity has also been strong, with trading volume for the first five months of the year up more than 56 per cent on the same period last year.
At the same time, the average trade size and value has halved – a clear suggestion that retail investor participation in our market has increased. This has been a global trend and the subject of much comment over the past few weeks, particularly in the United States.
Retail interest in our markets has not been seen on this scale since Mighty River Power's initial public offering in 2013.
With markets having swiftly recovered from March lows, investors are entering the market at a time when multiples are at historically high levels and when prices appear to be out of touch with fundamentals.
It is important that smaller New Zealand investors are encouraged to invest – New Zealand has historically seen low levels of direct investment in shares, and there is a significant gap between Government Superannuation and the cost of retirement – however, increased participation in our markets from retail investors may be short-lived if poor outcomes for investors result.
Seeing a new generation of investors turning away from our market, much the same as those who invested during the 1987 crash, would be highly detrimental to New Zealand's capital markets over the long term.
- Sam Ricketts is Managing Director, Head of Investment Banking, at Jarden.
• This article reflects the opinions and views at the time of publication, and is not to be relied upon as a basis for making any investment decision. Please seek specific investment advice before making any investment decision. Jarden is an NZX Firm, a broker disclosure statement is available free of charge at www.jarden.co.nz. Jarden is not a registered bank in New Zealand.