What You Need to Know About Capital Raisings on the ASX

Read on to learn how companies listed on the Australian Securities Exchange can raise cash, from private placements to rights issues.

There are different reasons why a company might be looking to increase its capital, from acquiring new assets to keeping a healthy balance sheet and everything in between.

It’s important for both new and seasoned investors to be familiar with the different options that companies have to raise money and how different methods can impact a company’s share price.

In uncertain times, companies from all sectors and exchanges face challenges in developing their assets, but how can companies listed on the Australian Securities Exchange (ASX) raise cash? The Investing News Network reached out to experts to answer your questions about capital raising on the ASX.

Understanding capital raisings on the ASX

Placements are the most common way for companies to raise capital, but there are plenty of other alternatives. In fact, on the ASX there are quite a few different avenues a company can take to raise capital and push forward with its plans. Here’s a brief overview of the main options a company has:

  • Initial public offerings (IPOs): IPOs happen when a private company decides to list on a public exchange, allowing it to raise capital from public investors. To undertake an IPO, the company needs to meet certain criteria.
  • Placements: A placement is an allotment of shares made directly from a company to investors in order to raise equity capital.
  • Share purchase plans: A share purchase plan allows eligible current shareholders to buy a capped amount of shares in a company’s capital raising at a predetermined price.
  • Rights issues: Rights issues or entitlement offers let existing shareholders buy more shares. In a renounceable rights issue, shareholders can trade or sell their “entitlement” or “right” to buy shares in the capital raising to other investors, while in a non-renounceable they don’t have that option.
  • Underwritten offerings: An underwritten offer happens when a party, such as an investment bank, agrees for a fee to buy any unsold shares in an equity capital-raising offer.
  • Options: Options give shareholders the right to buy more shares within a specific timeframe.

In 2020, the ASX introduced temporary measures to facilitate emergency capital raisings to help companies weather the COVID-19 storm. The move increased the placement capacity for listed companies from 15 percent to 25 percent of their share capital, as long as they met other requirements.

What to consider when a company is racing for cash

As 2021 kicks off, and with uncertainty still on the horizon, many companies will continue to look for ways to increase their capital. But what should investors consider when companies are racing for cash?

Antony Rumboll of Baker Mckenzie said Australian investors are receptive to companies raising equity capital and do not necessarily immediately see it as a negative.

“ASX companies raising capital for growth initiatives are generally supported if the market supports that initiative,” the Baker Mckenzie partner in Sydney said. “Equally, equity raisings to shore up balance sheets are generally supported, but will require a greater discount.”

Speaking about the impact of a capital raising on a company’s share price, Timothy Toner, managing director and founder at Vesparum Capital, said this is typically driven by the underlying rationale of the transaction and the deal parameters.

“Investors should be concerned if the capital raising is completed for sub-optimal reasons at an excessively high discount to the prevailing share price,” he added.

For Toner, capital raisings can be enormously dilutive to existing shareholders, so a compelling use of funds is critical to see from companies. “Lower discounts and fairer offer structures like entitlement offers are also positive for shareholders,” he said.

Commenting on the impact of raising cash, Rumboll said rights issues are generally priced at a discount to the theoretical ex-rights price and so can cause a share price drop once the rights issue is complete.

“That said, if the capital raising accompanies an accretive transaction, the price can quickly appreciate above the offer price,” Rumboll said. “Where a raising is designed to shore up balance sheets, the discount is often higher, potentially quite significant. So investors closely scrutinise the offer price and applicable discount as well as the use of proceeds.”

Can retail investors benefit from capital raisings?

The debate as to whether the way ASX companies raise capital favours institutional investors over retail investors has been ongoing for several years.

“Investors generally can benefit significantly from participating in discounted capital raisings,” Toner said. “However, institutional investors definitely receive the lion’s share of allocations, and therefore returns, as compared to retail investors. Clearly it’s not a level playing field.”

For his part, Rumboll said the boards of listed companies are sensitive to ensuring that capital raisings are equitable.

As such, he explained, rights issues, which can include or exclude a renounceable “right,” are a popular means for companies to raise capital to ensure that equitable approach. Or, where an institutional placing is employed, retail investors are usually provided an opportunity through a “share purchase plan” to maintain their investment in the company.

“During 2020, there was a significant emphasis on allocations of capital raisings, with an expectation from the market, and regulators, that existing investors would be given a pro rata allocation ahead of new investors,” Rumboll added.

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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