In this edition
Reactions to Difficulties Encountered In Raising Capital in the Global Financial Crisis
Summary
The global financial crisis has spurred a significant number of Australian listed companies to turn to capital raising in order to strengthen their balance sheets and refinance their high debt levels. Recent capital raisings include those by Macquarie Group Limited and Fairfax Media Limited. Alumina Limited has also recently completed the institutional component of its accelerated rights issue and intends to raise up to $285 million through the retail component of the rights issue.
It has been reported that more than $23 billion was raised through placements in 2008 and that almost half of the $18.64 billion worth of equity raised in the first quarter of 2009 was through placements. This data reveals that the current economic climate has created a new trend in the way in which capital raising is conducted. Where rights issues to existing shareholders were previously the preferred means of raising capital, we are now seeing an emerging tendency of companies to first offer an institutional placement and then a share purchase plan for retail investors.
The global financial crisis has also resulted in the Australian Securities Exchange (ASX) and the Australian Securities & Investments Commission (ASIC) granting numerous applications for class order relief, and proposing new measures to facilitate capital raising.
Common methods of capital raising
There are five common methods of capital raising:
- dividend reinvestment plans whereby existing shareholders of a company are permitted to reinvest their dividends in new shares, often at a discount;
- rights issues which give existing shareholders the opportunity to subscribe for a number of shares that is in proportion to their current shareholding;
- accelerated rights issues in which institutional shareholders are first given the opportunity to subscribe for shares prior to any other shareholders, followed by offers to retail shareholders;
- placements which involve the issue of shares to a limited number of investors, who are generally institutional or sophisticated investors. The offer of shares is not necessarily done on a pro-rata basis; and
- share purchase plans whereby existing shareholders are offered a number of shares (not on a pro-rata basis).
The capital raising measures set out above can be conducted without a prospectus or a disclosure statement, in certain circumstances. However, where a prospectus or a disclosure statement is not issued, a “cleansing notice” must be given by the issuer, which confirms that the market is fully informed and contains any information that has not been released in the course of continuous disclosure but is relevant to an investor’s decision.
The emergence of a new trend
In the current climate, companies are balancing an urgent requirement for capital with the interests of their retail shareholders and appear to have shunned rights issues in favour of capital raisings by way of an institutional placement and share purchase plans.
A rights issue can often take months to complete and companies do not immediately receive the proceeds of the issue. Appendix 7A to the ASX Listing Rules which prescribes timetables for conducting rights issues states that the minimum amount of time within which a pro-rata rights issue may be completed is 23 business days from the date of announcement of the offer to the ASX. In contrast, a placement may be completed much more speedily and funds from institutional placements are generally received soon after the placement is completed.
In terms of disclosure, both rights issues and placements can be conducted with the issue of a cleansing notice, as opposed to a prospectus. However, a cleansing notice in relation to a rights issue must be given within the 24 hour period before the first offer is made or at an earlier time required by the ASX. In contrast, an issuer is only required to give a cleansing notice to ASX within 5 business days after securities have been issued as a result of a placement.
The timing differences between rights issues and placements mean that the success of a rights issue is more likely to be affected by market volatility, and that companies receive much-needed funds sooner with a placement.
The regulatory response to the new trend
In December 2008, ASIC invited comments in relation to proposed changes to current class order relief. The changes would effectively allow for companies to issue a cleansing notice in relation to share purchase plans for issues of up to $15,000 per shareholder. The current class order provides that companies can only dispense with prospectus requirements where the share purchase plans are for issues of up to $5,000 per shareholder. For more information on these proposals, please see the article “ASIC Review of Share Purchase Plan Monetary Threshold for Disclosure Relief” which is contained in the April 2009 M&A Update.
The Register of ASX Listing Rule Waivers indicates that pending a decision on the changes to current class order relief regarding share purchase plans, ASIC has allowed a number of Australian listed companies to issue up to $10,000 worth of shares to each shareholder without a disclosure document. In particular, relief was granted to Westpac Banking Corporation (in late December 2008), Dexus Property Group (January 2009), and Commonwealth Bank of Australia (February 2009).
On 24 February 2009, ASIC released a further consultation paper which sought comments on proposals aimed at facilitating equity capital raising, such as broadening the circumstances in which a listed entity can conduct prospectus-free rights issues. For more information on this, please see the article “New ASIC Proposals to Facilitate Equity Capital Raising” below.
Most recently, the ASX announced that it is considering amendments to the ASX listing rules in relation to small to medium enterprises (SMEs) which are aimed at making it easier and cheaper for SMEs to raise capital. The current position is that companies are not able to raise more than 15% of their existing capital without shareholder approval and that companies can raise equity within 3 months after obtaining shareholder approval. The proposed amendments would enable SMEs to seek a blanket-type shareholder approval for equity raising over a 12 month period, as opposed to having to seek shareholder approval for each specific raising.
The ASX referred to the increasing importance of placements in the global financial crisis and the low level of available debt financing as the main reasons behind its move to amend the listing rules. It has reportedly stated to ASIC that the listing rules need to be changed in order to facilitate and increase the success of placements by SMEs, which are struggling to compete with the larger listed companies.
The events and data set out above indicate that the ASX and ASIC have recognised the difficulty that companies are facing in attempting to raise capital, and are attempting to ease the difficulty by exercising their respective discretionary powers or changing existing rules.
John Reen, Partner & Crystal Png, Lawyer
New ASIC Proposals to Facilitate Equity Capital Raising
ASIC released Consultation Paper 105: Facilitating Equity Capital Raising on 24 February 2009 and is in the process of reviewing comments and feedback from stakeholders regarding the proposals. The plan is to create or amend relevant class orders and materials this month (May 2009).
The proposals are ASIC’s latest response to the current economic climate, following the share purchase plan relief proposed earlier in February 2009. The fact that debt finance is becoming increasingly difficult to obtain means that many listed entities are struggling to secure and manage debt finance and accordingly, are likely to turn to capital raising. ASIC’s proposal for relief and the removal of certain impediments to capital raising will ensure that entities are better placed to obtain quicker injections of capital which may be vital to repay debts, decrease gearing or used as general working capital.
Managed investment schemes (MISs): removing the 10% discount cap on placements
Currently, MISs may not issue interests under a placement at greater than a 10% discount to the current market price without member approval. Responsible entities need to make adequate provision in their constitution for the consideration that is to be paid to acquire an interest in the scheme. To change this, member approval is required unless the responsible entity reasonably believes that altering the constitution will not adversely affect members’ rights.
Under the proposal, a responsible entity of a MIS may set the issue price of interests issued under a placement at any discount to market price (bearing in mind that the entity must act in the members’ best interests at all times). Therefore market conditions will determine the issue price of the interests, a commonsense move in the current volatile economic climate. Entities will save on the costs and time involved in obtaining member approval.
Relaxing the maximum 5-day suspension cap in relation to rights issues
There are currently exemptions in place for some rights issues and secondary sales of securities (where the issue is offered to all registered holders on a pro-rata basis and on the same terms) from having to issue a prospectus or PDS as long as trading in those securities has not been halted for more than 5 days over the shorter of either the period during which the class of securities is quoted or the previous 12 months. The issuer may instead be able to lodge a ‘cleansing notice’.
ASIC proposes to broaden the scope of the current relief by providing relief to entities where they have halted trading for a period greater than 5 days. It is proposed that this relief will be applied on a case-by-case basis (so that ASIC may consider, for example, the length and reason behind any suspension). To date, ASIC has only granted relief from the 5-day requirement in very limited circumstances.
Broadening the takeovers exceptions for rights issues
Some capital raisings can trigger the takeover provisions of the Corporations Act 2001 (Cth) where they result in a person acquiring a ‘relevant interest’ of greater than 20% in the securities.
ASIC proposes to grant class order relief to listed entities from the takeover provisions triggered by certain rights issues. The proposal would allow members to take up any shortfall in rights that other members have not accepted under a rights issue, without the need for member approval, even if in doing so they exceed the takeover threshold. This move would eliminate the need to prepare and distribute to members information regarding the resolution and to hold a general meeting, thereby reducing the costs and time involved in these transactions.
ASIC also proposes class order relief from the takeover provisions for accelerated rights issues that meet the conditions set out in Class Order 08/35 which provides relief from certain disclosure requirements for a rights issue that gives existing shareholders an equal opportunity to participate and does not compromise investor protection.
Companies should bear in mind that ASIC may still seek a declaration of unacceptable circumstances from the Takeovers Panel if it appears that the proposed relief is being abused in terms of control.
Dividend Reinvestment Plans (DRPs): broadening the takeovers exceptions
ASIC proposes to broaden the takeovers exceptions for DRPs through class order relief. This relief would allow an underwriter or major shareholder to take up a shortfall under a DRP, without the need for member approval of the acquisition, even if in doing so they exceed the 20% takeover threshold. This move would serve to reduce the associated transaction costs and timing requirements.
What do the proposals mean?
If adopted, the proposals will mean:
Geoff Cairns, Partner & Kate Prior, Graduate
ASIC Report on Corporations Act Relief Applications – August to November 2008
On Friday 24 April 2009, ASIC released a report, Overview of decisions on relief applications (August to November 2008) (Report) which outlines recent decisions on applications for relief from the corporate finance, financial services and managed investment provisions of the Corporations Act 2001 (Cth) (Act) between 1 August and 30 November 2008.
ASIC has powers to exempt or modify the Act under the provisions of Chapters 2D (officers and employees), 2J (share buy-backs), 2L (debentures), 2M (financial reporting and audit), 5C (managed investment schemes), 6 (takeovers), 6A (compulsory acquisitions and buy-outs), 6C (information about ownership of entities), 6D (fundraising) and 7 (financial services) of the Act.
The Report:
- summarises situations where ASIC has exercised, or refused to exercise, its exemption and modification powers from these provisions of the Act;
- highlights instances where ASIC decided to adopt a no-action position regarding specified non-compliance with the provisions, and features an appendix detailing the relief instruments it executed;
- aims to provide transparency and guidance to prospective applicants about ASIC's decisions when asked to exercise its discretionary powers to grant relief from the provisions of the Act, where compliance with the Act significantly detracts from its overall benefit or where business can be facilitated without harming other stakeholders; and
- includes a section on short selling relief which outlines ASIC's response to situations arising from the short selling ban introduced on 19 September 2008.
We encourage prospective applicants for relief to read a copy of the Report and to speak to a member of our M&A team before submitting any relief applications with ASIC.
A copy of the Report can be accessed via ASIC's website.
Peter Surgeon, Partner & Piny Ly Lawyer
Market Update
Once thought to be relatively immune to the global financial crisis, Australia has increasingly felt the effects of the economic slowdown. According to the Australian Bureau of Statistics, growth in the Australian economy shrunk by 0.1% in Q4 2008 and grew at an annualised rate of 0.6%. Although the economy has not technically entered a recession (defined as two consecutive quarters of negative growth), the governor of the Reserve Bank of Australia, Glenn Stevens, and Prime Minister Kevin Rudd have recently declared that the Australian economy is indeed in a recession.
The International Monetary Fund has forecast the Australian economy to register a -1.4% growth rate in 2009, followed by a modest 0.6% growth rate in 2010. Much of this is driven by a sharp deterioration in the economic conditions of Australia’s major trading partners – including Japan, China, South Korea and the United States. As a result of falling demand for Australian exports, commodity prices (including oil, copper, iron ore, coal, zinc and gas) have fallen sharply from their mid-2008 peak, which has had a negative effect on Australia’s export income (although this has, to some extent, been offset by the depreciation of the Australian dollar). Coupled with rising unemployment (now 5.7%), tight credit conditions and the widespread erosion in wealth brought about by the collapse in global equity and asset values, the economic landscape continues to remain precarious.
In response to the deterioration in economic conditions, the Federal Government has instituted a range of fiscal stimulus measures, including a $10.4 billion pre-Christmas stimulus package aimed at low income earners and pensioners, followed by a $42 billion economic rescue package in February 2009, which included substantial tax bonuses for low income earners, expenditure on physical infrastructure (including roads and utilities), assistance for continuing education and increased financial aid for first home buyers. Furthermore, the Reserve Bank of Australia has slashed the cash rate by 425 basis points since September 2008 to 3% at present, its lowest level since World War II.
Given the increased uncertainty in Australia's (and indeed the global) economic outlook, households and businesses alike have taken a more conservative approach to their finances, with investors quickly adopting risk averse profiles, paying down debt and reining in spending. Similarly, corporates have actively sought to reduce their leverage and repair their balance sheets. Most notably, many have turned to equity markets to raise additional capital to see them through what many believe will be a very difficult 2009 amid fears that financial conditions may still worsen, making it difficult to rollover maturing debt. Others have reassessed their spending plans and revised their annual budgets, particularly as profitability growth slows. However, SMEs may soon find relief if the new changes to the Listing Rules proposed by the ASX and ASIC to help small companies raise capital are implemented (see this month's M&A articles on "Reactions to Difficulties Encountered in Raising Capital in the Global Financial Crisis" and "New ASIC Proposals to Facilitate Equity Capital Raising."
Mid-market M&A
Australian mid-market M&A activity (up to USD$100 million) has fallen significantly from 2007 to 2008, with a decline in both total deal values and total number of deals. Total deal value fell 36% in 2008 from USD$23.97 billion to USD$15.23 billion, whilst the total number of deals fell 24% from 3,166 to 2,391.
While deteriorating economic conditions have forced many smaller and mid-sized businesses to postpone their growth plans, several mid-sized corporates with strong balance sheets and cashflow are capitalising on the opportunity to acquire assets at heavily discounted prices. As such, the past few months have seen a considerable rise in distressed M&A activity and industry consolidation.
Offshore buyers have recently been capitalising on the depreciation of the Australian dollar, encouraging a wave of foreign investment into the country. This has resulted in Australian cross-border activity more than tripling to USD$27.5 billion in Q1 2009 (compared to Q1 2008), with inbound activity totalling USD$25.5 billion, or 92.7% of total cross-border activity.
Peter Surgeon, Partner & Piny Ly Lawyer
The material contained in this publication is no more than general comment. Readers should not act on the basis of the material without taking professional advice relating to their particular circumstances.
