23/04/2020

 

The impact of COVID-19 continues to play out in global financial markets. In Australia, it has been almost 4 weeks since the ASX announced its first suite of temporary equity raising measures (Class Waivers), which are intended to support listed entities through uncertain and unprecedented trading conditions. Detailed information about the Class Waivers is provided in our earlier client alert, which is available here.

In terms of market response to the Class Waivers, here’s what we have seen since they came into effect on 31 March 2020 [1] -

  • Very substantial equity raising activity: Almost A$10 billion has been raised on the ASX in less than 4 weeks: A$9.3b has been raised through 41 equity raisings (> $5m), with 16 large raisings (> A$100m) contributing approx. 93.6% of that with almost A$8.7b.
  • Temporary Extra Placement Capacity: 39% of all placements have been conducted in reliance on the temporary increase in placement capacity under Listing Rule 7.1 from 15% to 25%. The uptake has been particularly strong for large raisings (>A$100m), with around 50% being conducted on this basis.  Not all of these have been entities in financial distress.
  • Waiver of 1-for-1 cap: 23% of all non‑renounceable entitlement offers have been conducted in reliance on the waiver of 1-for-1 offer cap under Listing Rule 7.11.3, with all but one of these being small non-renounceable entitlement offers (A$5m-$100m). Only one large raising so far has exceeded the 1-for-1 cap in reliance on the Class Waiver.
  • Retail participation: 78% of all raisings have been structured to enable retail shareholders to participate to some degree either as placements with accompanying SPPs or entitlement offers or standalone entitlement offers, with virtually all large placements (>$100m) being combined with an SPP.  All but one of the large raisings provided some opportunity for retail shareholders to participate.
  • Discounts: although it varies, offer discounts have been wider than usual given current trading conditions, namely -
    • For placements, the average stated discount to VWAP has been around 6.8% for large placements (>A$100m) and 13.4% for small placements (A$5m-$100m).
    • For entitlement offers, the average stated discount to TERP has been around 17.5% for large offers (>A$100m) and 60% for small raisings (A$5m-$100m). 

More broadly, commentary on the Class Waivers and related market activity has been mixed, with some describing recent equity raisings as ‘unfair’ and opportunistic, having regard to their impact on retail investors. As we reflect on the data, we think that the Class Waivers strike a reasonable balance between supporting listed entities to access capital and reducing the dilutionary impacts on shareholders during these challenging times. While we have seen the large majority of placements being accompanied by retail offers some raisings have included only small SPPs in the context of the size of the placements (in some cases, less than 10% of the placement size).

On 22 April 2020, ASX announced changes to the Class Waivers which included measures requested by ASIC to require greater transparency over allocation processes in so-called “super placements”.  However, a word of warning.  We anticipate that the new requirement to give prior notice to ASX of a listed company’s intention to rely on the Class Waiver for additional placement capacity is potentially indicative of a narrowing of the availability of that capacity.  Whether ASX will allow the additional placement capacity to be used in circumstances where the raising is not strictly required as a result of COVID-19 impacts is sure to be tested in the coming days.

The latest changes include -

Additional Disclosure Requirements

For placements, listed entities must now -

  • Announce to the market within 5 days of completing a placement (i) the results of that placement; and (ii) the approach it took in identifying potential investors, the allocations made to those investors and the key objectives and criteria used (including whether one such objective was to ensure a pro-rated allocation to existing investors); and
  • Provide to ASIC and ASX an allocation spreadsheet showing information such as the names of investors to whom securities were allocated, the number of securities applied for by, and issued to, those investors.

For capped SPPs, listed entities must now disclose to the market the reason for a cap being imposed and the method by which that cap was determined.

Importantly, ASIC has encouraged listed entities to apply these additional disclosure requirements to all placements and SPPs, even those that are not undertaken in reliance on any Class Waiver. ASIC has also made clear that it will closely monitor the quality of these disclosures to ensure they are ‘accurate’, ‘detailed’ and ‘meaningful’ rather than ‘boilerplate’ disclosures.

ASIC’s approach to the additional disclosure requirements will no doubt increase the pressure on boards from their shareholders on allocation decisions. If boards believe approaching allocation in a way that is not pro-rata is beneficial for the company, they will now be effectively required to explain what approach they have taken and why. Institutional shareholders of course have no obligation to act in the best interests of the company and will continue to be focused on what’s in their own best interests. 

It is also important to bear in mind that there are significant practical constraints on an entity’s ability to do this effectively in the context of quick-fire placements - accessing updated registry information is difficult and unlike the case with accelerated entitlement offers there is not time to conduct a reconciliations process with major holders due to bookbuilds taking place over the course of a single day rather than two days for entitlement offers.

It is not clear for how long the additional disclosure requirements will apply but it is possible that the market may not accept less transparency over the approach to allocations once the Class Waivers have ceased to operate.


Prior notice to ASX for Class Waiver Reliance

Listed entities must now notify the ASX in advance of commencing any equity raising where an entity intends to rely on any Class Waiver for that equity raising. The notice must be in writing and specify the reasons for which reliance is sought, including whether the equity raising is related to COVID-19 health crisis and/or its economic impact or for some other purpose. In practice we think this means that notice will need to be given with enough time before a raising is launched to deal with a scenario where ASX seeks to limit the company’s ability to access the additional placement capacity. This “early warning” requirement potentially adds uncertainty to the raising process for participants now requiring approval from ASX to use the additional placement capacity when market solutions and underwriting decisions are typically required to be decided and conducted quickly.


SPP Scale-back arrangements

Listed entities doing a super placement must now apply SPP scale-back arrangements on a pro rata basis to all participants based either on the size of their existing security holdings or the number of securities they have applied for :

Withdrawal of Class Waivers

The ASX changes also make clear that the Class Waivers can be withdrawn by ASX as follows -

  • in respect of a specific listed entity at any time and for any reason, by providing notice to that entity; and
  • to all listed entities prior to the scheduled expiry date of 31 July 2020, by providing notice to the market.

Further details regarding ASX’s most recent Compliance Update are available here.

 

[1] Note: the figures in this alert are estimates only based on publicly available data relating to placements, entitlement offers and accompanying SPPs announced between 31 March 2020 and on or before 22 April 2020 and excluding those valued A<$5m, standalone SPPs and raising by foreign exempt listed entities.

 

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