What if...: Annette Sampson

A capital raising gives investors the chance to top up their holding, often at a discount

DASH FOR CASH

The past couple of months have seen a rush of capital raisings by companies looking to shore up their reserves to get through the virus-induced downturn. Around $8 billion was raised by the end of April and the total is expected to rise well beyond that.

National Australia Bank (NAB) undertook a $3.5 billion capital raising in May. Other companies calling on shareholders for cash have included big names such as Cochlear, Webjet, Southern Cross Media, Flight Centre, Oil Search, QBE and Lendlease but they have by no means been alone.

Capital raisings can take several forms, but in an emergency companies often get the best bang for their buck by doing an institutional placement, selling a tranche of new shares to institutions such as superannuation funds. This can be done quickly and efficiently.

Companies can also offer shareholders a share purchase plan to add to their shareholdings, or some form of pro-rata entitlement plan or rights issue where shareholders are offered the chance to buy a specific number of shares based on their current shareholding.

To ease the process, the Australian Securities Exchange (ASX) and Australian Securities and Investments Commission (ASIC) introduced measures to make it easier for companies to raise capital until the end of July. ASIC has allowed the use of “low-doc” offers that provide limited information to retail shareholders and the ASX has lifted the placement capacity from 15% to 25% so long as they also offer a follow-on share purchase plan or prorata entitlement to shareholders.

THE BENEFITS

By tapping the market for extra cash, companies are ensuring they have the means to get through the crisis and out the other side.

It is likely some companies may not have survived the crisis without extra capital. Others are using capital raisings as insurance against tough times ahead. For example, NAB said its raising was intended to allow the bank to support its customers through the challenging times ahead, as well as preparing it for a range of possible scenarios, including a prolonged and severe economic downturn.

If you have confidence that the company will use the extra cash to build its business and emerge from the crisis stronger, capital raisings present a good opportunity to buy more shares at a discount and without brokerage costs.

THE DILUTION EFFECT

However, capital raisings have been widely criticised as being unfair to retail investors because of big institutional placements. Retail investors often have only a limited opportunity to participate and can see their holdings being diluted by the new shares.

Let’s say you own 10 shares in ABC Ltd,

which currently has 100 shares on issue. If it makes a placement to an institution of a further 25 shares, you will be left with 10 shares in a 125-share company. Your ownership, and entitlement to dividends, will have gone from 10% to 8%.

The ASX move to lift placement capacity only if there is an accompanying retail entitlement was an attempt to address this inequity. However, many shareholders may still be unable to buy as many new shares as they want, while others may be feeling the pinch and unable to take part in the offer.

WHAT TO DO

The ASX says if you had a gross income of more than $250,000 in each of the past two years or own net assets of at least $2.5 million you may be classed as a “sophisticated investor”, which gives you greater access to capital raisings.

If you don’t qualify, it’s important to consider the implications of capital raisings by companies that you own to decide whether you want to keep your shares and, if so, whether you want to add to your holding.

Under a share purchase plan, retail shareholders can now purchase up to $30,000 in new shares whereas a prorata entitlements base is based on your existing holding, which means larger retail investors will get a bigger entitlement than smaller holders.

In most cases, retail investors are able to buy new shares at or below the institutional price (depending on market movements) so they definitely warrant consideration.

Annette Sampson has written extensively on personal finance. She was personal finance editor with The Sydney Morning Herald,a former editor of the Herald’s Money section and a columnist for The Age. She has written several books.

Disclosure: The writer owns NAB shares.