Bonds and listings ‘likely sources of post-Covid capital’
● SA’s newest alternative exchanges say a post-Covid world could see companies tapping listed equities and debt markets again for capital as they try to repair their balance sheets.
Historically low global interest rates and the relatively expensive compliance costs of stock exchanges have made private equity or banks the go-to funding choice for small and medium-sized companies, but this could change in the wake of the pandemic.
The emergence of new exchanges in the past couple of years has also increased competition and should help provide lower-cost options for companies looking to do an initial public offering (IPO) or launch a bond.
Eugene Booysen, CEO of 4 Africa Exchange (4AX), which received its licence in 2016 and listed its first company the following year, said there is also a limit to what private capital or bank funding can provide to these companies, especially with the expected increase in demand.
“I think we are going to see companies out there being forced to repair their balance sheets and improve liquidity. We see an increase in the requirement for debt and equity funding and I think they are going to have to tap into public markets to do that.”
Booysen said the pipeline of new potential listings for 4AX was increasing and that the company was negotiating with prospective clients even in the midst of the Covid-19 pandemic.
Even before the pandemic, 4AX, in which Sunday Times owner Lebashe Investment Group is a major shareholder, said it had been experiencing growth in listings and also “seeing increased activity in the debt space”.
The exchange’s debt listing rules were approved in February.
“We intend doing our first debt listing in July,” Booysen said.
So far, the exchange has seven listings — with a combined market capitalisation of about R7bn — with insurance group Assupol the biggest name. The latest listing was ophthalmology-focused iHealthcare Group, which joined at the end of January.
“We do expect to triple our market capitalisation in the next 18 months. In terms of who you target, it’s not the company sitting with a R50bn market capitalisation. I think the sweet spot is that R100m-to-R2bn market cap range. Those are the companies that have good growth potential and end up being valued significantly higher in five years’ time. We want our companies to show growth potential, and those are the companies we want to seek out in the market.”
Booysen said the emergence of new exchanges provides simple, accessible digital marketplaces and will ultimately help lower costs for companies wanting to list. The cost of listing should not detract from companies looking to fund their growth.
A2X focuses on secondary listings, and its CEO, Kevin Brady, agrees that the balance sheets of a lot of companies have been “taking strain” and that mid-cap companies, in particular, may need to raise capital or seek a listing post-Covid-19.
“I guess the question is, which ones will go to market, which ones will go to private equity and which ones will go to banks?” said Brady.
He said mid-tier companies will probably want to list on public markets to raise capital. The larger companies already do this, whereas the smaller-cap stocks are likely to continue to tap private equity and bank funding until such time as the market affords them higher ratings and makes the case to list more compelling.
“I think in a post-Covid world, provided we are seeing the right economic policies in place, it would make sense for companies to come and raise cash. As people shore up balance sheets and get back onto a front foot of growth we should see more come to the market, at least for capital raises, and maybe some more entry level companies.”
Brady said A2X has also experienced strong growth since its launch nearly three years ago and now has a total of 30 companies listed, including Naspers, Standard Bank and Sanlam, as well as Absa’s three previous metal exchange-traded funds and Investec’s two exchange-traded notes. The combined market capitalisation of its listings is in excess of R2-trillion. The secondary listings, which are free of charge to the companies, offer investors an avenue to trade shares less expensively.
Etienne Nel, CEO of ZAR X, which has seven listings, said the exchange is experiencing steady growth and concluded a listing via Zoom during lockdown in April, when real estate investment trust Orion moved its listing from the JSE to ZAR X.
“There is a lot more competition now and companies will always look for a home to raise capital, either in the form of debt or equity. The critical factor is it needs to be costeffective.” Nel said companies will definitely come to market looking for capital to bolster balance sheets, and the exchange is expecting to conclude another listing before month end.
Valdene Reddy, director of capital markets at the JSE, said that in the past two years, before Covid-19, there was tremendous growth in the debt capital markets space, with the exchange seeing close to 710 fixed-income instruments issued in its market. But since early in the first quarter of 2020, it has experienced subdued activity in corporate bond auctions, “with several of the planned auctions postponed”.
As far as equities are concerned, the JSE has seen “muted activity in new listings, IPOs and corporate actions being put on hold due to uncertainty surrounding Covid-19”. To date this year the JSE has registered four new listings.
But Reddy said mergers and acquisitions are expected to increase, especially among companies with strong balance sheets taking advantage of available targets and depressed net asset values. “We are expecting to see an increase in secondary capital raisings for companies due to working capital requirements.”