Companies off to market for some ready money
Dilution fears as capital-raising bids line up on exchange
● Since lockdown first gripped SA, nine large JSE-listed companies have indicated that they intend to raise more than R17bn as they look to shore up balance sheets, reduce debt or make possible acquisitions.
And asset managers that hold positions in the largest companies on the bourse expect to see even more companies coming to market to raise capital as they navigate a battered economy.
Thato Matsafu, head of primary markets at the JSE, said in a statement the exchange is “expecting some of our listed companies to raise additional capital to meet their current financial obligations”.
Raising capital is one of the reasons equities markets exist, but there are risks involved for investors, particularly minority shareholders, depending on the type of capital raise a company undertakes.
The JSE said there are three types available: a general issue of shares for cash to the general market, a specific issue of shares for cash to specific investors, and a rights offer, in which existing shareholders have the right to be offered a new issue of shares by a company in proportion to their existing holdings.
Coronation Fund Managers, which holds sizeable stakes in many of SA’s top listed companies, prefers rights issues over specific issues to investors, saying it believes the latter negatively affect the holdings of minority shareholders.
It is also the group’s policy to generally vote against specific issues, or accelerated bookbuilds as they are called.
“You get two different types of capital raises: an accelerated bookbuild and a rights issue,” said Neville Chester, senior portfolio manager at Coronation Fund Managers. “When there’s an accelerated bookbuild placement, it happens very quickly and the company has the ability to phone up a stockbroker or a bank and issue the shares that night. If you’re a big institution like us it’s fine, because we are trading 24/7 and we can quickly act when we get that call and decide whether we want to follow it or not.”
But smaller investors, he said, “don’t get a look-in”. The top 20 shareholders in the register will be called, but not the bottom 1,000.
“That is the nature of it and that’s why our policy as a company is to vote against placing shares under the authorisation of directors [at AGMs], because we just think checks and governances are there for a reason. You want to prevent unnecessary dilution.”
Chester said a rights issue is different. It takes place over a slightly longer period, and everyone who holds shares in the affected company gets a chance to participate.
“At the end of the day not every shareholder will follow their rights but they at least have the opportunity to get in,” he said.
But there is still the risk of dilution, even in a rights issue.
Duncan Artus, portfolio manager at Allan Gray, another big shareholder in JSE-listed stocks, said: “If a rights issue is launched and everyone follows their rights, then there is no dilution. But if a company does a rights issue and you don’t believe it is the correct decision, but other shareholders pass it, then you get diluted if you don’t follow.
“It becomes tricky for the retail investor. If you don’t have cash to follow a rights issue, you can be diluted.”
Artus said another big debate is about the interests of equity-holders vs debtholders in a company, which is always a balance companies need to consider.
He said as companies get into difficulty because of the economic fallout from the pandemic, banks have to “raise provisions against non-performing loans”, which “depresses” their earnings and capital.
They encourage companies to go to the equity market instead of “investigating the ability to borrow more money, relax covenants and term out their debt”.
“They [banks] would understandably prefer companies to raise equity in the market. The inherent tension between the debtholders and equity-holders given their different positions in the capital structure gets more exposed when we go through something like we are now.”
As far as 2020 is concerned, in quarter one, the JSE said, 11 corporations raised R11.49bn, either through rights issues, specific issues or general issues of shares, compared with the R12bn raised by 12 companies in the same period last year.
However, since Covid-19 erupted, a further nine companies have indicated they will be doing capital raises — Mr Price, Stor-Age, Harmony Gold, Curro Holdings, Transaction Capital, TFG, Sun International, City Lodge and Pepkor.
Get it right first time
Explaining how Allan Gray makes a call on whether to follow its rights, Artus said: “We look at the valuation of a company and if we are going to put more of our clients’ money in we then look at what the value is going to be post putting money in.
“For instance, City Lodge, which has been a very profitable company for a long period of time, has now not had any revenue for months [because of the lockdown]. We look at the history. Is it a solvent company? Yes. Is it a good company? Yes. Is it worth putting money into? We think it is.”
Sometimes a capital raise is just not an option for shareholders.
Chester said that “Comair is a classic example”. It was forced into business rescue.
“If shareholders had wanted to keep that [Comair] business going they would have put in more capital. Given the difficulty of understanding just when airlines are going to be allowed to fly freely again, what the route capacity is going to be like, shareholders are just not going to be prepared to back a rights issue.”
Artus said it also “becomes more complicated” when businesses undertake a capital raise “just to be safe”.
“What you don’t want to do is give money to a business and then they pay it back to you as a dividend in one year and in between they’ve paid an investment bank an underwriting fee and advisory fee.”
Chester said he expects more companies to undertake capital raises in the coming months.
“Already we’ve seen far more announcements than we would have seen by this time last year. That’s been the norm globally as well.”
He said there are companies that may need to raise money as they are “under financial stress because they haven’t been able to trade for a number of months”.
“Then there are those that say there are a lot of businesses that are going to be under pressure and now is the time to do some corporate activity and we would like to have some powder to pounce on someone. ”
Chester said companies have to be sure that they are raising the right amount of capital.
"Don't plan on raising enough capital for the next three months; you need to be thinking 12 months, and what is trading going to look like and make sure you are raising that right number.
“The market generally gives you one chance at these things and they are very sceptical and unlikely to be supportive if you come back looking for additional capital,” he said.