This article was written by David Friedlander, Joseph Muraca and Amanda Isouard.
On 31 March 2020, the Australian Securities and Investments Commission ("ASIC") and the Australian Securities Exchange ("ASX") announced that they would each grant temporary capital raising relief to facilitate emergency capital raisings for ASX-listed entities. For many issuers, these changes may be the difference between raising capital to survive in a COVID-19 world and an uncertain future. This is a welcome relief for both issuers and investment banks and we expect it will lead to a flood of capital raisings over the coming months.
Key temporary measures
The key temporary measures in the:
- ASIC legislative instruments relate to providing relief to allow low doc placements, entitlement offers and share purchase plans ("SPP") where a listed entity has been suspended for a total of up to 10 days in the previous 12-month period; and
- ASX class order waivers ("Class Waivers")[1] relate to the allowing of 2 consecutive back-to-back (4 day) trading halts to consider a capital raising, a placement capacity uplift to 25% and a relaxing of the 1 for 1 non-renounceable entitlement offer cap.
With the benefit of our experience on working on emergency capital raisings during the Global Financial Crisis, we reached out to ASX a couple of weeks ago to request the placement capacity uplift and waiver of the 1 for 1 cap and put forward the case for them – so we were more than delighted to see that these changes have been implemented, given their benefit to issuers and underwriters alike. We have also been engaging with ASIC on the 10 day suspension point. Both ASIC and ASX should be commended for their ability to respond quickly to this economic crisis and the urgent need of some issuers for capital.
Key temporary changes to note:
- 2 consecutive back-to-back trading halts of 2 days each to consider a capital raising: Issuers may request 2 consecutive back-to-back trading halts of 2 days each (4 trading days) from ASX to consider, prepare for and implement the institutional component of a capital raising. This purpose of considering a capital raising should be made clear when the request for 2 consecutive back-to-back trading halts of 2 days each is made. If more time is then needed to implement the capital raising, the entity should go into voluntary suspension.
This change will facilitate issuers and underwriters undertaking soundings and potentially a bookbuild, without needing to go into suspension (the 2 consecutive back-to-back trading halts of 2 days each must be requested before, not after, suspension).
- 10 day suspension periods for low doc capital raisings: Previously, issuers could not issue a cleansing notice when they had been in suspension for more than 5 days in the previous 12 months (instead they would need to issue a prospectus or product disclosure statement). This has been proving impractical now as entities are often needing to go into suspension in order to consider the impacts of the COVID-19 pandemic and the economic crisis on their business and determine the best way forward without the distraction, delay or expense of having to prepare a disclosure document.
ASIC has given legislative instrument relief to allow low doc placements, entitlement offers and SPPs where an entity has been suspended for a total of up to 10 days in the previous 12-month period.[2] Individual relief applications are not required in order to issue the relevant cleansing notice.
In order to have the benefit of the relief, issuers:
- must have been suspended for up to 10 days in the 12 months before; and
- must not have been suspended for more than 5 days in the period commencing 12 months before the offer and ending 19 March 2020.
Issuers which do not meet this criteria will need to apply for individual relief or prepare a prospectus or product disclosure statement. ASIC will closely scrutinise applications of this nature.
We believe that this is a very helpful change for issuers who are dealing with the rapid and evolving impact of the crisis on their business. It will allow those issuers the time to consider the best options available for its business and securityholders and prepare for a potential capital raising, if needed.
- Placement capacity uplift with entitlement offer or follow-on SPP: ASX has raised the ASX LR 7.1 placement capacity limit from 15% to 25%, so long as accompanied by a pro rata entitlement offer or a follow-on SPP offer. The entitlement offer price and the SPP price must be equal to or less than the placement price.
ASX notes that the extra 10% is one off and cannot be ratified or replenished under ASX LRs 7.1 or 7.4. Issuers may only do one placement utilising up to that extra 10% placement capacity and it must be for fully paid ordinary securities only. An ASX waiver must be sought if an issuer wishes to do a further placement using up the remainder of the extra 10% placement capacity or if it wants to issue a different type of securities.
Guidance is given as to how the extra 10% should be factored into placement capacity calculations. Importantly, 'supersize waivers' have been factored into the Class Waiver so a separate ASX waiver is not required to facilitate that. 'Supersize' waivers permit the number of underwritten securities under an entitlement offer to be counted for the purposes of capacity calculations for a concurrent placement (subject to customary conditions being met).
ASX LR 7.1A entities who already have the extra 10% placement capacity (i.e. 25% in aggregate) may choose between using that existing extra 10% placement capacity or the extra 10% placement capacity available temporarily (where no previous securityholder approval is required), but not both. They must not issue more than 25% in aggregate under either capacity (or a combination of both), with any issue under ASX LR 7.1A depleting from the extra 10% (and vice versa).
ASX has also waived the following ASX LR 7.2 exception 5 SPP requirements in order to facilitate a follow-on SPP offer or any stand-alone SPP offer where the issuer is unable to raise capital via a placement or entitlement offer:
- that the placement capacity exception (ASX LR 7.2 exception 5) is only available once in any 12-month period;[3]
- the number of securities to be issued being not greater than 30% of the number of fully paid ordinary securities already on issue; and
- the issue price of the securities is at least 80% of the 5-day VWAP (measured from either before the day on which the issue was announced or before the day on which the issue was made).
Stand-alone SPP offers may be made at a price reasonably determined by the relevant Board.
If there is a limit on the SPP offer, issuers must use their best endeavours to give SPP offer participants a reasonable opportunity to participate equitably in the overall capital raising. Any SPP scale-back must be pro-rata and disclosed.
The purpose of these changes is to allow all eligible securityholders the opportunity to participate in the capital raising, including retail.
Issuers are required to notify ASX that they intend to rely on this Class Waiver and provide information on the circumstances in which they are doing so.
The placement capacity uplift follows a similar announcement by NZX on 19 March 2020 where it also raised placement capacity from 15% to 25%.
We are very supportive of these changes. The changes acknowledge that heavily depressed security prices have caused the dollar value of placement capacity to shrink, making it harder for issuers to get the funding they need quickly. In the current volatile market, placements have the advantage of being able to be done quickly and strategically (e.g. can incorporate existing institutional shareholders or new institutional investors), helping underwriters manage their risk and issuers to get urgently needed funding. The tie-in with the entitlement offer or an SPP is a good counterbalance to the possible dilution that may occur to retail investors with an upsized placement.
- Waiver of 1 for 1 non-renounceable entitlement offers cap: The waiver of the 1 for 1 cap applies to both traditional and accelerated non-renounceable entitlement offers (ASX LR 7.11.3). Issuers must choose a ratio that meets their capital raising needs and that is fair and reasonable in the circumstances.
Issuers are required to notify ASX that they intend to rely on this Class Waiver and provide information on the circumstances in which they are doing so.
We also believe that this change is of great benefit. The 1 for 1 non-renounceable entitlement offer cap had meant that issuers were not able to raise enough capital to shore up their future. This is at a time when volatility has meant that renounceable raisings are not a viable structure. It is also unlikely that a renounceable bookbuild in this environment would produce much premium for non-participating securityholders.
The relaxing of the 1 for 1 cap will allow for more suitable structures for particular issuers to be put in place so that they can quickly get the funds they need and underwriters can manage their risk.
ASX notes that there is no change to the rules on issues of securities to persons in a position of influence (ASX LRs 10.11 to 10.12).
Considerations for Boards
Both ASIC and ASX note their expectation that directors will continue to act in the best interests of the entity when determining the timing and structure of any capital raising. Directors will need to balance a variety of considerations, including the need for quick and certain capital, and the cost to, and possible dilution of, existing securityholders.
Sunset
ASIC has noted that it will revoke its legislative instrument relief with 30 days' notice following an assessment of the market and in consultation with key stakeholders. ASIC will monitor the use of the relief and intervene where necessary.
ASX has noted that its measures will be subject to review with industry participants closer to 31 July 2020 to determine if they should be modified or extended. ASX will also monitor the use of this temporary relief and intervene if they are not having the desired effect on capital raisings.
[1] Under ASX LR 18.1.
[2] ASIC Corporations (Trading Suspension Relief) Instrument 2020/289 and ASIC Corporations (Amendment) Instrument 2020/290.
[3] Issuers who have already undertaken an SPP in the previous 12 months may need ASIC relief for the $30,000 cap.
