What a year it has been for capital markets. Over the course of 2019, issuers have generally favoured using institutional placements and security purchase plans ("SPPs") to raise funds, rather than entitlement offers. We expect this trend to continue in 2020, particularly given ASIC's move to double the SPP participation limit from $15,000 to $30,000 per securityholder in August 2019.
Could this be the end of the entitlement offer era?
On 2 October 2018, ASIC released a consultation paper regarding updating ASIC's class order relief for SPPs ("ASIC CO 09/425").
Under ASIC CO 09/425, ASX-listed entities could make an SPP offer without a prospectus or PDS subject to meeting certain conditions. One of those conditions was that the securities issued did not exceed $15,000 per securityholder in any 12-month period (the earlier version of the class order had a $5,000 cap per securityholder).
In the October consultation paper, ASIC noted that it was only proposing to make minor changes to ASIC CO 09/425. In particular, ASIC stated that it did not intend to raise the $15,000 cap due to:
- there being less money raised under SPPs than when the cap changed in 2009;
- the impact of inflation not being significant; and
- it not seeing a "pressing commercial need" due to the lack of relief applications seeking a higher threshold and the "prevalence of companies raising funds under a rights offer using a 'cleansing notice'".
And then in August came ASIC's surprise when it released new ASIC Corporations (Share and Interest Purchase Plans) Instrument 2019/547 ("New ASIC Instrument"). Under the New ASIC Instrument, ASIC doubled the SPP cap to $30,000 per securityholder. In ASIC's response to its consultation paper it said that it had reconsidered its previous position regarding the cap. ASIC had determined that increasing the cap would, among other things, facilitate retail participation and reflect inflation, as well as provide cost efficiencies and flexibility for issuers without compromising on disclosure for investors.
Although the New ASIC Instrument was released to little fanfare, we expect it to have an impact on Australia's secondary capital raising landscape, which was already seeing a trend towards institutional placements and SPPs for larger deals. Since ASIC's announcement we have seen, among others, Westpac and Bank of Queensland launch $30,000 SPPs.
Why does this matter?
To put this in context – a securityholder would need to hold a parcel of securities with a value in the vicinity of $100,000 in a 1 for 3 offer (or $200,000 in a 1 for 6 offer) in order to take up $30,000 under an entitlement offer. Most retail securityholders will not have stakes in any one entity of that size. What this effectively means is that even more retail securityholders will be able to take up more than their pro rata stake through an SPP offer than in the past.
For a listed entity, the prospect of a fast-paced institutional placement and a follow on SPP is very attractive. Subject to placement capacity restrictions under ASX Listing Rule 7.1, entities will get the funds they require more quickly as placement bookbuilds are generally shorter than ones for entitlement offers. The due diligence process and offer documentation is also relatively less cumbersome than for an entitlement offer. It is also attractive for underwriters, who will generally only underwrite the institutional placement component and therefore will get off risk more quickly.
What's the catch?
There are some benefits to securityholders in entitlement offers that are not available under the institutional placement and SPP alternative. Entitlement offers allow eligible securityholders to participate for their pro rata share of new securities, meaning that they are not diluted and there is less likelihood of the capital raising having control impacts.
Renounceable entitlement offers give existing securityholders the opportunity to obtain some value for their entitlements if they determine not to participate or if they are ineligible because they are located in a foreign jurisdiction.
Pro rata accelerated institutional, tradeable retail entitlement offers (also known as 'PAITREOs') allow eligible retail securityholders to trade their entitlements at the front end of the offer, allowing them to get value at a similar time to institutional securityholders.
However, $30,000 is a fairly high amount, particularly for issuers with large numbers of securityholders. The flexibility the higher threshold creates for issuers may also lead to greater uncertainty as to how much will be raised. This may result in lower thresholds or total SPP offer caps being set or greater scale back taking place.
Given these points, it is very interesting that ASIC has made this change without further consultation. It remains to be seen what impact it will have on secondary capital raisings in 2020, but our best guess is that the $30,000 cap will make the institutional placement and SPP alternative a more compelling option than an entitlement offer for many boards.