A key takeaway for companies in the wake of the 2008 financial crisis revolved around liquidity – when times are tough, cash is king.
As a result, many businesses that survived the recession developed their balance sheets to be would be better able to keep them afloat and ticking on through difficult times. In a more ‘normal’ recession it is reasonable to expect some changes to consumer habits but people would still leave the house, go to the stores and buy non-essential goods if they wanted to.
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| Photo by Scott Graham on Unsplash |
The coronavirus lockdown has caused such widespread disruption that even these strengthened positions have been severely tested – understandably this has driven many corporations to raise additional funds.
Placings and rights issues are two ways to issue new shares and are a common way for a publicly traded company to raise said funds.
What are placings and rights issues?
A placing is when a company creates and sells (issues) new shares – this can be a convenient way to raise a significant amount of cash.
Rights issues offer new shares to existing shareholders based on the size of their current holding and are typically offered at a discount to the current price. Taking up your rights is optional and you are usually free to sell them on the open market instead of holding onto to them.
Whilst these methods are commonplace, the number seen in the first half of 2020 has been extraordinary with 201 companies raising a total of over $67bn between the start of March and early June.
Will a fundraiser dilute my investment?
Because rights issues are based on the number of shares you already own, those who take up the issue will retain their relative holding size and voting power. Conversely, a shareholders percentage of ownership will go down if they opt not to take up their rights.
Placings on the other hand guarantee dilution as they put more shares into circulation – the size of the pie is the same, but the number of slices increases making each slice smaller.
Opportunity or omen?
Fundraisers can be a great opportunity to secure capital for a new business venture that can grow the company without racking up masses of debt. A recent example is Ocado which raised £657m through a placing of new shares and a retail offer to existing shareholders as part of its investment strategy in the wake of coronavirus giving them just over £2bn in cash and equivalents.
The group had already raised £1.4bn in gross cash in December of 2019 through issuing convertible bonds to help its joint venture with Marks & Spencer – coming back to the table to raise more cash this soon raises questions, even during these strange times.
It is up to shareholders to decide if they are supportive of this kind of situation and if they agree with the investment opportunities the company is pursuing.
A company may be pressured to raise funds simply to appease the landlord rather than investing in an opportunity. In ‘normal’ times asking for extra cash just to stay afloat is often viewed as a red flag– if this is such a good and profitable company, why can’t they keep the lights running?
In such a situation investors are (for good reason) told to be diligent in their assessment of the company’s prospects and be confident that the circumstances that demanded a fund raising is an outlier rather than the trend.
A global pandemic triggering mass lockdowns is certainly a reasonable outlier from business as usual, however the question of future prospects only grows - is strengthening the balance sheet of a company that may still be experiencing massive disruptions to its day to day operations for an unknown amount of time a prudent decision?
As previously mentioned a rights issue is voluntary in nature and is the concern of existing shareholders. One can reason that if the shareholder is not supportive of the justifications given for a rights issue and therefore has no interest to partake, they ought to consider having any stake in the company whatsoever. That is to say, if you feel uneasy about purchasing additional shares at a discounted price you may want to consider holding any shares at the full market rate.
What should you take away?
Even without a global pandemic fund raisings are a common occurrence, with their prevalence likely to remain elevated for much of 2020. It is reasonable to evaluate your portfolio from time to time and a company stretching out its hand is a good opportunity for a thorough assessment.
Good questions to ask might be – what lead this company to needing a handout, what is the money going towards and what is going to change in the future to avoid the need of another hand out?
This article is not
advice and has not been prepared in accordance with legal requirements designed
to promote the independence of investment research – no recommendations are
given in the buying, selling or holding of any investments. Past performance is
not a guide to the future. Investments rise and fall in value so investors
could make a loss. Always seek professional advice.