15 June 2020

Raising capital in the time of COVID-19 – ASIC and ASX grant temporary capital raising relief

This article was written by David Friedlander, Joseph Muraca and Amanda Isouard.

The Australian Securities and Investments Commission (“ASIC”) and the Australian Securities Exchange (“ASX”) have each granted temporary capital raising relief to facilitate emergency capital raisings for ASX-listed entities. 

As part of the relief package, they have also required enhanced disclosure when relying on the temporary relief, particularly around allocation decisions.  ASIC has also called for the enhanced disclosure to apply to capital raisings more broadly.

For many issuers, the temporary capital raising relief may be the difference between raising capital to survive in a COVID-19 world and an uncertain future.  For others it creates opportunities.  Either way, these changes are a welcome relief for both issuers and investment banks and have facilitated a flood of capital raisings over the past couple of months.

Both ASIC and ASX have foreshadowed that the relief is only temporary.  ASIC recently announced that its temporary relief would be repealed in October 2020 (but ASIC reserves the right to end the relief earlier or later than that date)[1]. The end date for the ASX temporary relief is not yet clear but it is expected ASX will consult with industry participants closer to 31 July 2020 to determine any modification or extension.

Despite the capital raising relief, both ASIC and ASX have reiterated their expectations that directors will continue to act in the best interests of the company as a whole when determining the need for, timing and structure of any capital raising.  As always, 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.  The regulatory relief does however provide issuers with more options in uncertain times.

Key temporary measures

We have issued previous Client Alerts on ASIC’s and ASX’s initial temporary capital raising relief (Raising capital in the time of COVID-19 – ASIC and ASX grant temporary capital raising relief and Raising capital in the time of corona – ASX issues revised temporary capital raising relief).

The key temporary measures from the regulators are as follows:

  • ASX – increasing placement capacity to 25%, allowing 2 consecutive back-to-back (4 day) trading halts and relaxing the 1:1 non-renounceable entitlement offer cap[1]; and
  • ASIC – allowing low doc placements, entitlement offers and share purchase plans (“SPP”) where a listed entity has been suspended for up to 10 days in the previous 12-months.[2]

We reached out to ASX at the beginning of the COVID-19 crisis to call for the placement capacity uplift and waiver of the 1:1 cap and put forward the case for them. It was great to see these changes implemented and then relied on by so many issuers and underwriters.  We had also been engaging with ASIC on extending the suspension condition to 10 days.  We commend both ASIC and ASX for responding quickly to the rapidly changing conditions and the urgent need of some issuers for capital. 

A summary of the key temporary changes is set out below

Change

Details of change

Commentary

Placement capacity uplift to 25% with entitlement offer or follow-on SPP

The ASX LR 7.1 placement capacity limit has increased from 15% to 25%. There are some conditions that try to facilitate participation by all investors, including retail (see below).

The extra 10% is one-off and can’t be replenished or ratified. The waiver also codifies ASX’s approach to allowing ‘super size’ waivers for combined fully underwritten entitlement offers and placements.

Other than the allocations disclosure requirements, 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 securityholders 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.

ASX’s allocations disclosure changes were made in the context of media commentary and some stakeholder agitation regarding allocations in a small number of recent capital raisings.  ASX is to be commended for proposing a sensible approach for placements which take up some or all of the temporary extra placement capacity, as it balances keeping the market informed and not over-regulating the competitive auction process necessary to ensure high quality bookbuild processes. 

We do not believe that any further allocations disclosure-related changes should be made by ASX or ASIC.  We are strongly of the view that the vast majority of participants in institutional bookbuilds are well advised and do not need extra regulator protection.  They are sophisticated parties who “play the game” with the same level of brinkmanship as those on the other side of the allocations process.  Based on our experience, allocations are usually a business judgment made by issuers (with advice from their advisers) in good faith and for a proper purpose, with no material personal interest and where they rationally believe the allocations are in the best interests of the entity.  We consider that increased disclosure of the nature suggested by some that goes further than what has been required by ASX can do more harm than good. This is because it will negatively impact the tools boards have at their discretion as they navigate the bookbuild process.

 

Retail offer

The placement must be accompanied by a pro rata entitlement offer (whether on a traditional or accelerated timetable) or a follow-on SPP offer.

Procedural relief is also given to more readily facilitate SPP offers – including standalone SPP offers.

Pricing

The entitlement offer price and the SPP price must be equal to or less than the placement price.

SPP caps and scaleback

If the SPP follows a placement above 15% and has a cap, all reasonable endeavours need to be used to ensure that SPP participants have a reasonable opportunity to participate equitably in the overall capital raising.  The issuer also needs to disclose why a limit was used and how it was determined in relation to the overall capital raising. 

Any associated SPP scaleback must be on a pro rata basis based on the size of existing securityholdings or on the number of securities applied for. 

Allocations disclosure

After completion of the placement, the entity must announce to ASX:

  • the results of the placement;
  • reasonable details of the approach taken in identifying investors to participate and how allocations were determined; and
  • that as far as it is aware, no securities were issued (or agreed to be issued) to any related parties without securityholder approval or without reliance on a listing rule exception.

In addition, the issuer must at the same time privately give ASX and ASIC a detailed electronic allocation spreadsheet setting out certain prescribed information. ASIC’s public statements indicate it is particularly focused on decisions around allocations which is consistent with an associated report ASIC released in late 2018.[3]

Suspension condition for low doc capital raisings extended

ASIC has allowed 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 (typically the maximum suspension period is 5 days).[4] 

There are some quirks to this. To rely on the relief, issuers:

  • can be suspended for up to 10 days in total in the previous 12 months before the offer is made (for entitlement offers) or before the offer securities are issued (for placements); but
  • cannot have been suspended for more than 5 days in the period before 19 March 2020 – that is, the effect of the relief is to allow for more suspension only during the COVID-19 period.
ASIC announced on 12 June 2020 that this relief would be repealed on 2 October 2020 (but ASIC reserves the right to end the relief earlier or later than that date).

This was a very helpful change for issuers at the start of the COVID-19 pandemic as it allowed them time to consider the best options available and to prepare for a raising.

There has been less take up of this relief as time has passed given entities have had more time to consider the impacts of the COVID-19 pandemic. 

 

 

2 consecutive back-to-back trading halts of 2 days each to consider a capital raising

Issuers can 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.  Typically 2+2 halts were only granted upfront to facilitate accelerated entitlement offers and not to allow time to consider fundraising options.

The request for 2 consecutive back-to-back trading halts must be specifically asked for upfront. 

This change has facilitated, and will continue to allow, issuers and underwriters to undertake confidential soundings and potentially a bookbuild, without needing to go into suspension.  It allows them to gather valuable information from soundings which can be used to better price and structure the capital raising.  It also helps entities to limit the number of days they are in suspension so that they can stay within the relevant suspension period limit under the cleansing notice regime.

Waiver of 1:1 non-renounceable entitlement offers cap

ASX has waived the 1:1 cap for non-renounceable entitlement offers.[5]  Issuers must choose a ratio that meets their capital raising needs and that is fair and reasonable in the circumstances.

We also believe that this change is of great benefit.  The 1:1 non-renounceable entitlement offer cap had meant that issuers were not able to raise enough capital to shore up their future.  This was particularly problematic at the beginning of the COVID-19 pandemic when market volatility and uncertainty had meant that renounceable raisings were not a viable structure. 

The relaxing of the 1:1 cap has created flexibility 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.

 


Notification to ASX of intention to rely on class waivers

Issuers are required to notify ASX at least a few days in advance that they intend to rely on the placement capacity uplift and/or 1:1 class waivers and provide information on the circumstances in which they are doing so.

The class waivers are not limited to raisings undertaken to deal with COVID-19 related issues.  However, the ability to rely on them (particularly the expanded placement capacity) is a matter for ASX’s discretion.  Recent experience has shown that where the purpose is not COVID-19 related and/or urgent ASX may not allow an issuer to take the benefit of the waiver.

Related parties

There is no class waiver change to the rules on issues of securities to persons in a position of influence.[6]  However, there are some recent examples of case-by-case relief being made available for pro rata participation by certain related parties and significant securityholders in placements in particular circumstances.  Where available, this is very helpful for issuers where commercially it is better to undertake a placement than an entitlement offer and they want to enable those parties to participate and not be diluted.

 


[1] ASIC Corporations (Amendment) Instrument 2020/565.

[2] The placement capacity uplift and relaxing of the 1:1 cap are through class waivers under ASX LR 18.1.

[3] ASIC Corporations (Trading Suspension Relief) Instrument 2020/289.

[4] See ASIC Report 605 (“Allocations in equity raising transactions”), December 2018.

[5] ASIC Corporations (Trading Suspension Relief) Instrument 2020/289 and ASIC Corporations (Amendment) Instrument 2020/290.

[6] ASX LR 7.11.3.

[7] ASX LRs 10.11 to 10.12. 

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