This article was written by Joseph Muraca
Westpac’s decision to conduct its recent $2.5 billion equity raising via an institutional placement and security purchase plan (“SPP”) continues the recent trend of ASX200 entities raising equity capital through this structure rather than through an entitlement offer. This trend is a clear departure from market practice a few years ago, when entitlement offers were more prevalent and were promoted by many as the ‘fairest’ method of raising capital, with advocates for retail securityholders particularly having strongly argued in favour of entitlement offers. We have not yet seen that narrative repeated for the most recent capital raising activity.
There may be many reasons why a placement/SPP structure has increased in popularity of late – for example, the speed of execution (e.g. due diligence process and offer documentation are relatively less cumbersome, placement bookbuilds are generally shorter and therefore entities get the funds more quickly), potentially more favourable underwriting terms (including that underwriters will generally only underwrite the institutional placement component and therefore will get off risk more quickly) and the increased volatility in capital markets. At the same time, the perceived unfairness of a placement/SPP structure to retail securityholders may have been largely negated by the recent increase of the individual SPP limit to $30,000. That monetary threshold would typically allow most retail securityholders to subscribe for an amount of securities equal to or greater than their pro rata amount (subject to scale back), but of course, does not provide any scope to compensate non-participating securityholders for dilution. With the placement/SPP structure becoming more popular, it is important that boards, management and their advisers continue to carefully consider the different structures available when raising capital and determine what works best in the particular circumstances. In this article, we highlight some of the data on placements and SPPs that we have observed to demonstrate key trends and market practices for ASX200 entities.
What’s the market?
There were 11 placements by ASX200 entities between 1 July 2017 and 30 June 2018 and that increased to 23 placements between 1 July 2018 and 30 June 2019. Since 1 July 2019 to 13 November 2019, there were 8 placements. In contrast, there were only 4 entitlement offers by ASX200 entities between 1 July 2019 and 13 November 2019 and 5 in total since the start of this calendar year. As shown in chart 1 below, the average amount of capital raised per placement is steadily increasing. Chart 2 also demonstrates that placements are becoming more popular with larger ASX200 entities. In the last 4 months alone, 3 ASX20 entities have completed a placement and accompanying SPP:
- Transurban Group;
- Macquarie Group; and
An explanation of how we arrived at our dataset is set out at the end of this article.
The majority of placements since 1 July 2017 (86%) were accompanied by an SPP. As chart 3 demonstrates, SPPs were most commonly priced at the lower of the placement price (or equivalent) and the 5-day VWAP (or a discount to the VWAP) at the conclusion of the SPP offer period. This ‘lower-of’ pricing mechanism is intended to provide flexibility to adapt to changing market conditions over the SPP offer period and to avoid the SPP offer price being ‘out of the money’. These pricing structures can typically be easily accommodated to fit the ASX Listing Rule pricing parameters that apply to SPPs. At the same time, 44% of SPPs were set at the same price as the preceding placement.
Nearly 55% of SPPs since 1 July 2017 were oversubscribed (i.e. where applications by securityholders exceeded the SPP cap). Of those, roughly half were scaled back to some extent. While there are a range of scale back methodologies, most entities (78%) reduced applications on a proportionate basis. Other scale back methods included capping applications at a certain amount or applying different scale back rates depending on the size of the securityholding.
While not an exact science, we have also broadly categorised the purpose of each raising in our dataset into the following 3 categories:
- acquisition funding;
- funding of a development pipeline; and
There are raisings which fall into more than one category but splitting the data this way yields some interesting results. Entities are increasingly using the placement/SPP structure for pipeline raisings, which comprised 71% of all placements and 60% of the capital raised since 1 July 2019, up from 9% and 18% respectively in FY18.
The reason for the raising also appears to have had a significant effect on the placement price discount and the SPP take-up by retail securityholders. As to be expected, recapitalisation raisings, for example, had the highest average discount, as seen in chart 5 below. They also generated the least retail participation, with 40% of recapitalisation SPPs being oversubscribed, compared to the oversubscription rates of 76% and 44% for acquisition and pipeline SPPs respectively.
Notes on our dataset
Our data captures all placements and SPPs between 1 July 2017 and 13 November 2019 that were completed by entities in the ASX200 as at 31 October 2019. This means that some entities were outside the ASX200 at the time of conducting the placement/SPP. The dataset does not include Westpac’s SPP as the offer period was still open as at 13 November 2019. Raisings which involve strategic investors have also been excluded, given that these raisings involve a different set of dynamics.