Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 372

Why are companies raising capital during COVID?

The uncertainty about the impact of the pandemic on the business operating environment sparked many capital raisings on stock exchanges around the world. Australia led the world with more than $30 billion raised from the beginning of the year to 4 August 2020. The change to ASX listing rule 7.1, which increased the amount of capital companies could raise in institutional placements from 15% to 25% of issued capital, was a significant measure to provide additional flexibility for ASX-listed companies to efficiently raise capital. The ASX has since extended its temporary capital raising relief to 30 November 2020.

Investors have done well from new issues

Overall, participating in capital raises during the COVID period has yielded strong returns for investors. Recent data by fintech Fresh Equities showed that the average non-weighted return for the 205 placements completed in May and June was 59% to 1 August 2020.

So why are companies seeking to raise capital in the middle of a global pandemic? Some examples include:

  • To boost liquidity as revenue streams temporarily dried up during the pandemic
  • To shore up balance sheets or to help companies bolster their regulatory capital positions, and
  • To pursue opportunities for potential new business ventures or acquisitions that may arise.

During the market downturn in the first half of 2020 investors helped recapitalise companies that were affected by the pandemic. Since the beginning of 2020, Australian Ethical has participated in more than 30 capital raisings with over $60 million in new capital invested. Overall, we have helped recapitalise around 30% of the ASX-listed companies that we own in our actively managed portfolios, with about half of that capital going to companies in the healthcare and IT sectors (areas we are overweight as a result of our Charter).

We also underwrote some capital raises, which meant that if a company was looking to raise $5 million (for example) and only raised $4 million, we agreed to make up the shortfall.

Here are three companies we helped recapitalise in 2020 and their purposes for issuing.

Somnomed – short-term liquidity

Somnomed manufactures and sells devices for the oral treatment of sleep-related disorders in Australia and overseas. The company’s revenue was negatively impacted during lockdown because the diagnosis and referral of patients for its sleep apnoea product was disrupted. Somnomed raised capital to boost its short-term liquidity during the lockdown period and as a long-term holder of the stock, we were happy to participate in the institutional placement.

NAB – balance sheet repair

We invest in two of the major banks, NAB and Westpac. On balance, we believe responsible and well-regulated banks can do good. For instance, while both NAB and Westpac make loans to the fossil fuel industry, they are also significant funders of renewable energy. More than 75% of Westpac’s lending to the electricity sector goes to renewable projects and for NAB the figure is 69%.

We currently assess that Westpac and NAB are implementing their commitment to lend in line with the economic transition our society needs to limit global warming to 2°C. We participated in NAB’s institutional placement of $3 billion announced in April after the bank revealed nearly $1 billion in loan impairments, largely attributable to the COVID crisis.

Janison – new opportunities

Janison is an ‘ed-tech’ company that provides digital learning and assessment platforms that are designed to replace pen and paper. Janison’s technology enables students to take exams at home or on a device in a classroom, positioning it well for the surge in demand for online test taking. We helped the company raise additional capital to pursue new opportunities overseas and at home in Australia, where Janison has recently been selected by the NSW Department of Education to deliver the state’s selective school tests.

As an ethical fund manager, we invest in sustainable companies with good growth prospects that we believe will provide long-term benefits to society. Participating in capital raises is one way we achieve that goal.

 

Deana Mitchell is an equities analyst at Australian Ethical, a sponsor of Firstlinks. This article is for general information and does not consider the circumstances of any investor.

For more articles and papers from Australian Ethical, please click here.

 

banner

Most viewed in recent weeks

My lessons from five decades of investing

As she retires after 47 years as a portfolio manager, Claudia Huntington explains the art rather than the science of investing, the value of a great leader and culture, and the insights she gives to new colleagues.

20k now or 50k later? What’s driving decisions to withdraw super?

The amount of retirement savings withdrawn under the Superannuation Early Release Scheme has surprised many. This comprehensive survey of thousands of Cbus members explains their motivations.

Have the rules of retirement investing changed?

In retirement, we still want to reduce stock volatility while generating cash flows. The two needs have not changed, but the reward expected in the old days from interest payments has gone. What should we do?

One last hurrah for the 60/40 portfolio?

The 60/40 diversified portfolio has been the mainstay of the superannuation industry for decades. But it is built on a fundamental principle of defensive bond returns, and its time is nigh.

YourSuper will save $17.9 billion! Surely you’re joshing

In Budget 2020, Josh Frydenberg announced a performance comparison tool and fund stapling to save Australians $17.9 billion over 10 years. But too many moving parts make results highly cyclical.

The elusive 12%: is superannuation at a turning point?

Such is the concern among unions and Labor about Government plans to undermine superannuation that an 'Emergency Summit' was called this week, and pioneer Bill Kelty evoked a social commitment.

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 379

It is trite and obvious to say the future is uncertain, and while COVID-19 brings extra risks, markets are always unpredictable. However, investing conditions are now more difficult than ever, mainly because the defensive options for portfolios produce little income. We explore whether investing rules have changed with new input from Howard Marks.

  • 15 October 2020
  • 6
Retirement

Have the rules of retirement investing changed?

In retirement, we still want to reduce stock volatility while generating cash flows. The two needs have not changed, but the reward expected in the old days from interest payments has gone. What should we do?

Shares

Tech continues to run on rising prices not profits

The global tech run paused in September but the boom is driven by rising prices rather than actual profits. It will end when global confidence in the prospect of endless monetary and fiscal stimulus runs out.

Investment strategies

When defensive assets become indefensible, turn to tech

During COVID-19 and the economic recession, we are seeing a surprising new entrant to the defensive sector grouping. Technology shares have been behaving a lot like defensive shares such as food and utilities.

Interest rates

10 reasons low interest rates may limit growth

Ultra low interest rates could be counterproductive for economic growth. Policymakers need to rely less on monetary stimulus and be mindful of the side effects they are creating, especially for retirees and savers.

Financial planning

What the RC, Budget and Keating mean for aged care

Although the Aged Care Royal Commission (with Paul Keating) and Budget announcements gave the aged care sector high profile, the welcome 'granny flat' changes came with inadequate extra Home Care Packages.

Investment strategies

Is currency exposure an unwanted risk or source of returns?

As more Australians invest overseas, currency exposure represents a new risk. 50% hedged, 50% unhedged was once a popular ‘least regret’ approach, but there's a move to currency as a return source.

Shares

High growth and low rates incompatible with current share prices

The unrealistic value creation through lowering discount rates while assuming high growth shows a sensible link is critical. Interest rate assumptions need as much valuation focus as the cash flows of the business.

Sponsors

Alliances

© 2020 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.