Australian equity raisings jump as debt markets contract

The number of companies raising finance through equity issues has exploded in Australia, with over A$67 billion raised this year.

Companies have tapped shareholders for capital at a time when debt financing has been difficult to get, and expensive.  The number of initial public offerings on the Australian Securities Exchange has dropped, with only $673 million raised by the end of August, but investors have stampeded into new share offerings by known companies, and many have made substantial capital gains due to the recovery in stock markets since March.

The four big banks which dominate the financial sector raised funds to top up capital adequacy ratios and major companies such as Qantas, Santos and Westfield issued equity to strengthen balance sheets.  Smaller companies also found investors willing to buy new shares to fund projects.

Institutions have been able to subscribe to new share issues using inflows of funds from Australia’s compulsory retirement system.  KPMG’s national head of mergers and acquisitions Rob Bazzani said in spite of the most turbulent trading periods in decades, over $60 billion of equity was raised during the financial year ended June 30, 2009, most of it from rights issues and private placements.

“Irrespective of the GFC there is still a lot of institutional money looking for a home. This funding is available largely driven by our mandated superannuation (pension) contributions which provide over $60 billion per annum needing investment by Australian fund managers and super funds,” he said.

Interest in raisings has been so keen at times that requests have had to be scaled back and the corporate regulator, the Australian Securities and Investments Commission, is examining some of the rules around equity raisings to see if they should be relaxed.

There are various ways of raising equity capital on the Australian market:

- a rights issue, an offer to existing shareholders to buy new shares.

- an accelerated rights issue, or Jumbo issue, a two-stage process where institutional investors are invited to participate first by making an offer for shares, and retail investors get a later offer.  As experienced investors, the institutions do not require the same level of explanatory documentation as small investors but they have to decide quickly and put their money up front earlier.  They do, however, get an option of how many shares they can take up while the offer to smaller investors will generally be limited to between $5,000 and $15,000. Sometimes the price to retail shareholders is set through a book build to the institutions.

- a placement to a group of investors.  These can attract criticism because shareholders who are left out tend to feel aggrieved and see their holdings diluted.  Placements are sometimes done as part of a Jumbo issue so that institutions who do not hold shares in a company can take up some of a new issue.

- share purchase plans to smaller shareholders, typically for $5,000 to $15,000.

- dividend reinvestment plans for shareholders to use their dividends to buy more shares instead of taking the money.
Company directors need to consider carefully which structure to use according to Robert Pick and Tom Story, partners in the legal firm Allens Arthur Robinson, who regularly advise ASX-listed issuers and underwriters on equity capital markets transactions.

In a paper on decision making for directors wanting to tap the markets for equity, they say directors need to consider a range of competing, and sometimes divergent, interests and must firstly satisfy themselves that an equity raising is in the company’s best interests.  The structure they choose will have a direct impact on shareholder value and could affect retail, institutional and foreign shareholders differently.

Directors need to consider their continuous disclosure obligations, particularly for the low documentation issues to institutions, which involve an offer without a prospectus and which are becoming increasingly popular because they enable companies to raise funds comparatively quickly.

Pick and Story say directors also need to consider the after-market and retain some control over the allocation of new shares to ensure a stable market after the raising, preferably by ensuring the shares go to medium to long-term investors rather than hedge funds who might want to sell them straightaway.

Sources:

www.aar.com.au
www.asic.gov.au
www.asx.com.au
www.kpmg.com.au