Market volatility has been creeping up this month - new COVID cases, stimulus uncertainty and geo-political games are all to blame. Volatility and capital markets activity have a funny relationship.
The more volatility there is, the less inclined investment banks and companies are to take on the risk of hitting the market for funding. Settlement risk is an important factor here. There is usually a 4-7 day gap between the launch of a raise and the settlement date, this presents risk for all parties (investors, companies and brokers). Investors in particular are kept in the hot seat during these situations. A placement at an 8% discount today might appear to have sufficient downside protection, but if COVID cases spike in the next week and markets retreat, then you may be underwater on the investment before it's even settled.
For larger raises this issue is more pronounced as the deals are quite often fully-underwritten. In other words, balance sheet is at risk for banks. All of this is likely to have (for now) put the brakes on larger raises. Keen followers of capital need not worry, the small/mid-cap sector is still rolling out deals.
Smaller deals, but still all about growth.
As we foreshadowed in last week's article, raising for growth has become a recurring theme.
Uniti Group kicked off the week with a $270m entitlement offer to be used for acquiring their larger listed rival, OptiComm. Uniti has been on an acquisition spree since listing early last year, on the company's mantle already are: Call Dynamics, LBNco, OPENetworks and 1300 Holdings. Post the OptiComm deal, the combined companies will become Australia's newest mid-cap telco with a market cap of around $1b.
Betmakers provides analytics and data services for the wagering industry, they too made a trip to equity markets this week for the purpose of "organic and inorganic growth initiatives" among other things. The deal raised $35m quite comfortably and was not followed by an SPP or shareholder offer.
Also looking for growth funding was Beston Global Food Company. The food manufacturer rattled the tin on Thursday for a $10m placement and $2m SPP. The new funds were pegged for increasing capacity at their Lactoferrin processing facilities. Lactoferrin is a natural protein derived from milk that is used in dietary supplements, recognised for its positive effects on the immune system.
Get ready for the next wave of capital raising...
A lit bit of volatility can be helpful for capital markets, it makes discounted placement stock appear attractive to just about any type of investor. But the reward must carefully offset the risk.
We've seen smaller companies approach this situation by offering larger discounts (see below the number of raises offering >15% off) and taking full advantage of the 4 day trading halt rule. We believe that there's a growing list of companies, both large and small, that managed to weather March/April but are waiting for the right time to the pull the trigger on a trading halt. Another considerations, the ASX's 25% placement rule which Vicinity Centres and NextDC most recently took advantage of, is due to expire on the 31st July. The clock is now ticking for numerous reasons - volatility, listing rules, COVID - it's a lot to consider.
Investors should ready themselves for another wave of raises, and if things play out as they did in April/May, the returns should be just as juicy.
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