Hearing-device manufacturer Cochlear (ASX Code: COH), for example, on 26 March 2020, announced it raised $880 million from a successful fully underwritten institutional placement (the offer size was increased from the expected $800 million due to investor demand).

On 1 April 2020, Cochlear announced an SPP for Cochlear shareholders up to a maximum of $30,000 new fully paid ordinary shares per eligible shareholder (without incurring brokerage or transaction costs).

The SPP aimed to raise up to $50 million. Eligible retail Cochlear shareholders can subscribe for shares at $140 each – the same price offered to institutional shareholders through the placement. The SPP was not underwritten.

Cochlear expects its SPP offer to close on 23 April 2020. The company said it may decide to accept applications that result in its SPP raising more or less than the targeted $50 million.

Why companies issue more stock to institutions in capital raisings

In the following hypothetical example, a listed company needs to raise capital quickly to strengthen its balance sheet during the COVID-19 pandemic. Market volatility is high, the company’s share price has halved and uncertainty about COVID-19 is rampant. The Board is concerned the company might not survive the crisis as its revenue falls.

The fastest way to raise capital is to offer shares to the company’s largest shareholders – typically institutional investors such as Australian superannuation funds, through a placement.

The investment bank that raises capital for the company underwrites the placement because it is confident institutional investors will buy the shares at the offer price.

The company offers less stock in the capital raising to its retail shareholders through an SSP because their collective ownership of the company is far less than that of institutional shareholders. Also, it takes longer to raise capital from retail shareholders and there is no guarantee they will subscribe for all the shares in an SPP. 

Due to greater market uncertainty with the SPP, the offer is not underwritten. 

The company estimates that 80 per cent of its shares are owned by institutions and 20 per cent by retail investors. It allocates $400 million of its $500 million targeted equity capital raising to institutional investors and $100 million to its eligible retail shareholders. 

The successful equity capital raising means the company now has more shares on issue, some of which were issued at a significant discount through the offer.

Institutional and retail investors who bought stock at a discount to the share price (before the offer) benefit if the share price rises. 

But some retail shareholders find the value of their shareholding has been “diluted” because there are now more issued shares. Dilution of retail shareholders is a recurring criticism of emergency capital raisings.

Deciding when and how much capital the company should raise, and how to balance the needs of different stakeholders in the offer – in conditions of high uncertainty during the COVID-19 pandemic – is a complex decision for boards. 

Following are three industry perspectives on the capital-raising changes.

Boards must balance the company’s needs to survive the COVID-19 crisis with the needs of majority and minority shareholders - securing access to guaranteed equity capital may be the number-one governance priority for some companies. 

Boards must also consider how the capital raising affects all stakeholders; for example, if raising equity early helps more employees keep their job, customers get access to products or services they need, suppliers get paid on time, it will also help the company to emerge stronger,  post crisis. This issue is not only about the impact on shareholders in the short-term - all stakeholders should become re-aligned in the long-term.

In my experience and to date, the majority of boards are managing to get the best possible result for all shareholders. They are not blindly following the advice of bankers or corporate advisers, and are cognisant of market scrutiny of the company’s capital-raising approach during the COVID-19 crisis.

From mid-March, equity capital raisings were via placements and almost all of them attached a share purchase plan to ensure retail shareholders were offered participation at the same price as institutional investors in the placement. 

From early April when a few deals got done and market volatility settled, most Boards have opted to raise the majority of equity via rights offerings.  

Rights offerings were simply not an option at the start of this crisis as there was no appetite from banks to underwrite over the three-week retail rights offer period. This may change again and will move with market performance and volatility.  Boards will have to react and approve what is appropriate, at that time.

I believe companies so far have done a much better job during COVID-19 than they did in the GFC in terms of explaining the full suite of measures that have been taken to address the impact of COVID-19. There have been detailed investor updates from companies on their debt facilities, dividend policy and initiatives to reduce operating and capital expenditure. The equity capital raising should always be the final part of a full package. 

I am, however, concerned that large shareholders who have board seats on a company (and are deemed ‘insiders’) cannot participate in placements. In my opinion, such shareholders should be able to participate, at least for their pro-rata and not have dilution forced on them. It sends the wrong message when a key shareholder is prohibited from participating in, and supporting, a placement in a crisis.

Overall, the capital-raising changes offer Boards the flexibility required and should help ASX-listed companies during the COVID-19 pandemic.”

It is easy to speculate on whether some investors benefit too much at the expense of others or criticise the changes in hindsight, but the measures are weighted towards broader participation. Ultimately, all shareholders benefit if a company survives because it raised sufficient equity capital via ASX.

Retail shareholders have more opportunity in COVID-19-related capital raisings compared to those during the GFC. The maximum entitlement available to an individual securityholder through an SPP over a 12-month period is $30,000 (after ASIC doubled the amount in August 2019. The cap was $5,000 until June 2009) and can even be refreshed. 

The $30,000 cap is a significant amount, particularly for smaller retail shareholders who would get less opportunity in a rights issue.

Also, the changes are designed to ensure eligible retail shareholders can participate in the equity capital raising at the same or a lower offer price as institutions. I think the positives far outweigh any negatives in the changes. 

We advise many boards on equity capital raisings and have watched directors agonise over fairness questions in these offers. In my opinion, boards are cognisant of the need to balance the interests of small and large shareholders in capital raisings, and alert to the problem of diluting retail shareholders who do not participate in offers or are scaled back.

The board’s base case is usually to do a renounceable rights issue so that all shareholders are treated equally, but volatile markets are rarely conducive to renounceable offers. 

The least dilutive capital-raising option from a discount and opportunity perspective is a placement to institutions and an SPP to retail shareholders, where all eligible shareholders are able to subscribe for new shares at or below the institutional price.”

"Other capital raisings indicate that they will scale back retail-investor allocations if there is too much demand. In some offers, less than 10 per cent of new stock has been allocated to retail investors.

That said, I recognise these are difficult, volatile conditions for companies to raise funds and that speed to market is vital with capital raisings. 

I understand why companies go straight to their largest shareholders when they need more capital, but that is no excuse to allocate too small a proportion of the raising to retail shareholders, some of whom might have large sums to invest.

I also recognise that the institutions that receive most of the stock in capital raisings are often investing superannuation money, so small investors benefit in that sense. But companies should not overlook the needs of retail shareholders who invest actively and directly in shares. 

It would be great in this technology-driven age if there was a platform that allowed shareholders to bid for stock at the same time as institutional investors so that companies can get access to capital quickly and retail investors do not necessarily have to miss out.”

S&P/ASX300 Announcement summary, 1 – 22 April 2020

• 39 companies provided business updates surrounding COVID-19 impact (refer to table below)
• 13 companies updated or withdrew FY20 guidance (ABC, REG, TLC, CGC, HPI, ADI, SVW, CPU, CIP, CMW, COF, HSN, NSR) 
• 7 companies deferred their dividend (HLS, FXL, GEM, BOQ, SEK, MVF, REG) 
• 1 company cancelled their dividend (HVN)
• Across all ASX-listed companies, 44 companies raised capital totalling $5.6bn (refer to table below)
• Crown Resorts (CWN), Downer EDI (DOW) and Sydney Airport (SYD) announced new bank loan facilities  
• Virgin Australia (VAH) entered Voluntary Administration
• Telstra (TLS), Unibail Rodamco (URW) and Atlas Arteria (ALX) issued Eurobonds to a combined value of €2.4b
• Wesptac (WBC) and Oceana Gold (OGC) announced new appointments of CEO, with Insurance Australia Group (IAG) announcing their CEO will retire by year end. 

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