This article was written by Joseph Muraca, Diana Nicholson and Will Heath.
Raising capital in the COVID-19 environment presents a number of challenges, including ensuring that raising-related disclosure is timely and accurate.
This article focuses on some of the key disclosure issues and associated due diligence considerations that we have encountered working on a range of recent COVID-19 capital raisings.
In summary:
- Almost all of the large COVID-19 secondary capital raisings have been structured as 'low doc' institutional placements and share purchase plans ("SPPs"). In that context, while the Australian Securities Exchange ("ASX") and the Australian Securities and Investments Commission ("ASIC") have issued regulatory relief and guidance which aims to address a number of structural and timing issues associated with secondary equity raisings in the COVID-19 period, that relief and guidance does not materially change the key disclosure requirements for a placement/SPP. In essence, ASX-listed entities must 'cleanse' the market of all previously undisclosed material information.
- COVID-19 presents a number of specific disclosure challenges. First, since the onset of the pandemic, ASX-listed entities have largely abandoned earnings guidance and, in turn, guidance is unsurprisingly absent from COVID-19 capital raising disclosure materials.
- Second, although earnings guidance is gone, disclosure of corporate strategy and the impacts of COVID-19 needs to be carefully formulated including on matters of expense reduction, qualitative statements on business performance, and forward-looking commentary on business recovery. Key risk disclosure should also be revisited to ensure it addresses the challenges of the COVID-19 period.
- Third, in the uncertain and volatile COVID-19 environment, ASX-listed entities are focusing on preparing for raisings promptly as available windows open. In this fast-paced environment, appropriate due diligence processes need to be observed which give adequate attention to COVID-19 impacts. Commencing work on disclosure materials (such as key risks) will help facilitate an efficient due diligence and launch process. Regulators have not ceased to police ASX disclosures in the COVID-19 period and the Chairman of ASIC, James Shipton, recently confirmed that ASIC is taking a "laser-like focus" to monitoring disclosures, including in relation to COVID-19 capital raisings.
The following sections capture further insights we have learned from recent COVID-19 capital raisings. Please feel free to reach out to your King & Wood Mallesons contacts if you would like further information.
Have the disclosure requirements changed for COVID-19 capital raisings?
In general, no.
While ASX and ASIC have issued regulatory relief and guidance. which aims to address a number of structural and timing issues associated with COVID-19 capital raisings, that relief and guidance generally does not change the key disclosure requirements for secondary raisings.[1] Similarly, although the Treasurer has enacted welcome changes to continuous disclosure rules, those changes do not directly address liability associated with capital raising disclosure.
To date, almost all of the large COVID-19 secondary raisings have been conducted by way of placements and SPPs (continuing the trend from the pre COVID-19 period), with a minority of raisings involving an accelerated non-renounceable entitlement offer (sometimes in combination with a placement). The disclosure requirements for placements/SPPs and accelerated entitlement offers are substantially similar and broadly require the ASX-listed entity to 'cleanse' the market of all previously undisclosed material information.
Strict liability essentially applies to disclosures made by an ASX-listed entity in connection with the capital raising and so an appropriate due diligence process should be adopted. Regulators have not ceased to police ASX disclosures in the COVID-19 period and the Chairman of ASIC, James Shipton, recently confirmed that ASIC is taking a "laser-like focus" to monitoring disclosures, including in relation to COVID-19 capital raisings.
What is the focus of COVID-19 disclosure?
Apart from a handful of ASX-listed entities raising for acquisitions and growth, almost all large COVID-19 capital raisings have been focused on early balance sheet stabilisation or, in cases of entities under greater financial pressure, recapitalisation.
In this context, there is a strong focus on disclosure of liquidity, gearing and other key financial metrics, as well as pro forma balance sheets and associated financial information.
Clear and concise disclosure on debt financing arrangements has been a common feature of COVID-19 raisings, with the aim to demonstrate available debt headroom to buttress the equity being raised.
Common themes and traps in this area include to ensure (as part of an appropriate due diligence process):
- that capital raising disclosure in relation to financial indebtedness is consistent with disclosure provided to, and the status of material discussions with, the entity's lenders; and
- that presentation of non-IFRS financial information, which remains a focus for ASIC, is clear and not misleading.
We also recommend ASX-listed entities seek clarification early in the capital raising process as to whether external comfort is available and appropriate in relation to financial information used in the capital raising documentation. A number of sizeable raisings have been executed concurrently with half-year and/or full-year results, which allows for pro forma financial information to be prepared on the basis of audited or reviewed balance sheets. Other sizeable raisings have been executed during financial periods and in these cases, ASX-listed entities have generally provided a form of trading update on financial metrics.
What is the impact of COVID-19 on forward-looking statements?
In the highly uncertain COVID-19 environment, ASX-listed entities have almost universally (with one or two exceptions) avoided providing earnings guidance in their capital raising documents. This approach has not stymied the successful completion of COVID-19 capital raisings and is consistent with ASX's guidance in early April which recognised that that ASX-listed entities may wish to withdraw or suspend earnings guidance on the basis of the rapidly evolving and highly uncertain nature of the pandemic.
Although guidance has gone, ASX-listed entities who have successfully raised capital have aimed to provide meaningful disclosure on their strategies to deal with COVID-19 and, where appropriate, how recovery from the pandemic might arise. In this respect, in working with a number of ASX100 entities on recent raisings and also benchmarking disclosure trends, we have observed forward-looking statements being made on matters such as:
- expected cost savings and cost reduction initiatives, such as the deferment of non-essential capital expenditure, changes to operating expenses and reductions in remuneration in the current financial period;
- impacted market and/or trading conditions – e.g. expectations for the remaining financial period or calendar year; and
- recovery benchmarking based on analogous pandemics (e.g. SARS) and/or economic downturns (e.g. the GFC) as an indication of when business performance may improve.
Although these disclosures do not provide specific guidance on future revenues, they are forward-looking in nature and must be made on reasonable grounds.
What about key risk disclosure?
Key risk disclosure in the COVID-19 environment involves more than mere repetition of pre-COVID business risks set out in annual reports and past equity raising documentation.
COVID-19 presents a number of challenges which our ASX-listed clients have addressed through specific standalone risk factors and supplementary disclosure to standard business, industry, market and equity offering risks. Additionally, care is being taken to qualify forward-looking statements about business strategy and recovery, including, as relevant, acknowledging that there is no guarantee that some operations or markets will normalise to a level existing prior to the impact of COVID-19.
As the COVID-19 situation evolves, we expect a strong focus to remain on disclosure and new challenges may emerge from a variety of factors such as:
- 30 June year end results reporting, including in relation to the use of non-IFRS profit measures (on which ASIC has recently issued a warning), asset valuations and credit and liquidity risks;
- evolving government and regulatory responses to the pandemic, including relaxation of lockdown measures in some places and potential 'second wave' lockdown in others; and
- geopolitical and macroeconomic events.
[1] The main exception to this is that ASX-listed entities intending to rely on the temporary ASX class waivers will need to comply with certain content disclosure requirements regarding allocations and other matters which are summarised in our separate note.
