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

Where Baby Boomer wealth will end up

By 2028, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but deflated. Where will this generation's money end up, and what are the implications for the wealth management industry?

Are term deposits attractive right now?

If you’re like me, you may have put money into term deposits over the past year and it’s time to decide whether to roll them over or look elsewhere. Here are the pros and cons of cash versus other assets right now.

Uncomfortable truths: The real cost of living in retirement

How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.

How retiree spending plummets as we age

There's been little debate on how spending changes as people progress through retirement. Yet, it's a critical issue as it can have a significant impact on the level of savings required at the point of retirement.

Meg on SMSFs: $3 million super tax coming whether we’re ready or not

A Senate Committee reported back last week with a majority recommendation to pass the $3 million super tax unaltered. It seems that the tax is coming, and this is what those affected should be doing now to prepare for it.

20 US stocks to buy and hold forever

Recently, I compiled a list of ASX stocks that you could buy and hold forever. Here’s a follow-up list of US stocks that you could own indefinitely, including well-known names like Microsoft, as well as lesser-known gems.

Latest Updates

Retirement

How much do you need to retire comfortably?

Two commonly asked questions are: 'How much do I need to retire' and 'How much can I afford to spend in retirement'? This is a guide to help you come up with your own numbers to suit your goals and needs.

Investment strategies

Protecting retirement income from inflation shocks

As we continue to navigate a volatile market and geopolitical landscape, retirees need a portfolio with protection from inflation risks so that they don’t experience another cost-of-living crisis when inflation has another upturn.

Investment strategies

Where to find value in a multi-asset portfolio

Bonds have had a dreadful few years and their positive correlation to equities of late means they may not be the diversifier in portfolios that they once were. What are the alternatives to bonds, and where might there be value?

Superannuation

How the $3 million super tax impacts unfunded pension schemes

Unfunded defined benefit plans mostly cover current and former Commonwealth and State public servants. These schemes are different from funded ones, yet the new $3 million super tax will treat them similarly.

Exchange traded products

Two overlooked tax advantages of investing in ETFs

We're nearing the financial year-end and it's a good time to think about your tax strategies. Here are two tax advantages to having ETF investments, plus a bonus perk if you’re in a fund hedged to the Aussie dollar.

Property

Why healthcare is a compelling property niche

Healthcare has been a bright spot in an otherwise challenging environment for commercial property. With an ageing population, the sector's future remains bright, and here's a look at the best ways to play it.

Strategy

The maths of friendship

Did you know you're far more likely to share genes with friends than non-friends? Or the number of friends you have is correlated to the size of certain parts of your brain? These are the latest findings of a famed psychologist.

Sponsors

Alliances

© 2024 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. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. 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.