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

10 little-known pension traps prove the value of advice

Most people entering retirement do not see a financial adviser, mainly due to cost. It's a major problem because there are small mistakes a retiree can make which are expensive and avoidable if a few tips were known.

Check eligibility for the Commonwealth Seniors Health Card

Eligibility for the Commonwealth Seniors Health Card has no asset test and a relatively high income test. It's worth checking eligibility and the benefits of qualifying to save on the cost of medications.

Hamish Douglass on why the movie hasn’t ended yet

The focus is on Magellan for its investment performance and departure of the CEO, but Douglass says the pandemic, inflation, rising rates and Middle East tensions have not played out. Vindication is always long term.

Start the year right with the 2022 Retiree Checklist

This is our annual checklist of what retirees need to be aware of in 2022. It is a long list of 25 items and not everything will apply to your situation. Run your eye over the benefits and entitlements.

At 98-years-old, Charlie Munger still delivers the one-liners

The Warren Buffett/Charlie Munger partnership is the stuff of legends, but even Charlie admits it is coming to an end ("I'm nearly dead"). He is one of the few people in investing prepared to say what he thinks.

Should I pay off the mortgage or top up my superannuation?

Depending on personal circumstances, it may be time to rethink the bias to paying down housing debt over wealth accumulation in super. Do the sums and ask these four questions to plan for your future.

Latest Updates

Investment strategies

Three ways index investing masks extra risk

There are thousands of different indexes, and they are not all diversified and broadly-based. Watch for concentration risk in sectors and companies, and know the underlying assets in case liquidity is needed.

Investment strategies

Will 2022 be the year for quality companies?

It is easy to feel like an investing genius over the last 10 years, with most asset classes making wonderful gains. But if there's a setback, companies like Reece, ARB, Cochlear, REA Group and CSL will recover best.

Shares

2022 outlook: buy a raincoat but don't put it on yet

In the 11th year of a bull market, near the end of the cycle, some type of correction is likely. Underneath is solid, healthy and underpinned by strong earnings growth, but there's less room for mistakes.

Gold

Time to give up on gold?

In 2021, the gold price failed to sustain its strong rise since 2018, although it recovered after early losses. But where does gold sit in a world of inflation, rising rates and a competitor like Bitcoin?

Investment strategies

Global leaders reveal surprises of 2021, challenges for 2022

In a sentence or two, global experts across many fields are asked to summarise the biggest surprise of 2021, and enduring challenges into 2022. It's a short and sweet view of the changes we are all facing.

Shares

2021 was a standout year for stockmarket listings

In 2021, sharemarket gains supported record levels of capital raisings and IPOs in Australia. The range of deals listed here shows the maturity of the local market in providing equity capital.

Economy

Let 'er rip: how high can debt-to-GDP ratios soar?

Governments and investors have been complacent about the build up of debt, but at some level, a ceiling exists. Are we near yet? Trouble is brewing, especially in the eurozone and emerging countries.

Sponsors

Alliances

© 2022 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 ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.

Website Development by Master Publisher.