ASX has released an information paper entitled Capital Raising in Australia: Experience and Lessons from the Global Financial Crisis. The paper, which was released on 29 January 2010, examines the experience of capital raisings in Australia during the Global Financial Crisis (GFC), considers various capital raising mechanisms adopted by Australian listed entities, and addresses the criticisms that have been levelled at Australia’s capital raising arrangements.
During the period of the GFC, there was an unprecedented amount of equity capital raising in Australia. Following the collapse of Lehman Brothers in September 2008, it was unexpected that major Australian corporates would be able to re-equitise in the way they did. However, a record $106 billion of new equity capital was raised in Australia in 2009 and the Australian market was held up globally as a model for other jurisdictions to follow.
Australia’s regulatory regime in respect of capital raising seeks the balance of providing flexibility for entities to adjust quickly to changing circumstances and raise capital in a timely and cost effective manner, while treating existing and potential shareholders fairly. The strength of Australia’s regulatory framework is that it does not adopt a “one-size-fits-all” approach or limits the capital raising options available to the boards - instead, it empowers boards to exercise their fiduciary duty to determine the capital raising mechanism that is in the best interests of the entity as a whole.
While ASX is modest about the role of Australia’s regulatory framework in facilitating capital raisings during the GFC, the re-equitisation of Australian listed entities was extremely well facilitated by ASX and ASIC and encouraged by Treasury.
We see the paper as an important one in its reflections on the way the Australian environment held up in a time of crisis. As a firm, we have spent a large amount of time in recent years working with legislators, regulators and our clients on reforms aimed at making capital raisings more flexible and efficient. The paper vindicates those efforts.
Set out below is a summary of key points from the ASX information paper:
Placements, SPPs and rights issues - Australia’s flexible capital raising arrangements allowed corporates to quickly adjust their capital raising preferences to suit the prevailing market conditions. During the worst of the GFC, entities utilised institutional placements, often combined with a securities purchase plan, to achieve speed and certainty. As the market recovered, they moved towards pro-rata issues, in particular, accelerated rights issues.
Rights issue flexibility - Corporates were also able to adopt the suitable rights issue structure depending on the prevailing market conditions. During the worst of the GFC, entities relied on non-renounceable rights issue structures (e.g. Jumbo structure), and shifted towards renounceable rights issue structures (e.g. RAPIDS and AREO) as the market stabilised.
Innovation - The GFC also saw development of new rights issue structures, being the fixed price Jumbo and the Simultaneous Accelerated Renounceable Entitlement Offer (SAREO) structures, which were facilitated by Australia’s existing capital raising framework. Our clients were at the forefront of these innovations.
Fairness - Although there were suggestions that the range of capital raising options should be restricted to ensure the “fairness” to shareholders, the experience of the GFC shows that more flexible capital raising arrangements are better adapted to volatile economic circumstances.
Board role - The board of directors is the appropriate body to decide which capital raising mechanism is the most appropriate. During the GFC, the boards have become increasingly sophisticated in their consideration of various issues in making this decision, which include the size and urgency of the funding, the prevailing market conditions, the purpose of the capital raising, the overall cost of capital, the costs and availability of alternative sources of funding and the interests of existing and potential shareholders.
Retail debt market - The corporate bond market in Australia remains relatively underdeveloped. The refinancing risks exposed by the GFC, together with the prospective regulatory change to reduce the compliance costs of retail debt offerings, may act as a catalyst to broaden and deepen this market to provide another important source of finance for corporates and an important new asset class for investor portfolios. We have been working hard with regulators and our clients to development the retail debt market in Australia.
Mallesons advised on a significant number of capital raisings by major listed entities during the GFC. In particular, we acted on all of the SAREO structure capital raisings (CSR and Macquarie Media Group) and Australia’s three main retail debt offerings (AMP, Brookfield Multiplex and TabCorp) in 2009.