"Equity Letter Template"
ASX Limited ABN 98 008 624 691 20 Bridge Street Sydney NSW 2000 PO Box H224 Australia Square NSW 1215 Telephone 61 2 9227 0867 Facsimile 61 2 9227 0917 www.asx.com.au 6 April 2009 Ms Jane Ecclestone Senior Manager, Corporations Australian Securities & Investments Commission By email: email@example.com Dear Jane Consultation Paper 105: Facilitating Equity Capital Raising Please refer to ASX’s submission, attached. Please do not hesitate to contact Gary Hobourn, Senior Regulatory Policy Analyst (Phone: 9227 0930), or me if you require further information. Yours sincerely Malcolm Starr General Manager Regulatory and Public Policy ASIC Consultation Paper 105: Facilitating Equity Capital Raising ASX Submission Broker Trades Message Specification 6 April 2009 (November 2007) AS X Market Information Consultation Paper 105: Facilitating Equity Capital Raising ASX welcomes the opportunity to comment on the ASIC consultation paper, and agrees that, given current conditions in financial markets, companies will increasingly seek to access equity capital to finance their operations as debt markets remain tight. The significant volatility in asset prices experienced since the onset of the financial crisis (and which accelerated following the September 2008 collapse of Lehman Brothers in the US) combined with, a general increase in risk aversion and the need for companies to raise capital to strengthen balance sheets has created a unique set of circumstances which ASX believes supports an easing in capital raising rules to underwrite the financial health of Australian corporations. We support ASIC’s four proposals to use its power under the Corporations Act to ease some existing restrictions on capital raisings through: • Removing the 10% discount limit on placements for listed managed investment schemes; • Modifying the maximum 5-day suspension period for rights issues and secondary sales without a full prospectus (e.g. following a placement); • Broadening the takeovers exception for rights issues; and • Broadening the takeovers exception for dividend reinvestment plans. As noted in the consultation paper, the measure related to listed managed investments provides those vehicles with the ability to take into account prevailing market conditions in pricing an issue, rather than being constrained by a discount limit that, in the context of recent placements by other companies seems particularly restrictive. We believe there is no convincing argument for such a restriction and removing it would be an important reform to facilitate capital raisings by these entities. In a similar vein, the proposal to grant case-by-case relief, to companies from the prospectus requirements for a rights issue where the company does not satisfy the existing 5-day (within a twelve month period) suspension criteria is a sensible measure that should enable more companies to conduct such an issue by relying on a cleansing statement. We believe the factors ASIC would consider in granting such relief are appropriate. Although the absence of any, even general, guidance from ASIC on how it might assess and balance those factors, it is difficult to make any judgement about how beneficial the proposal will be to companies. Broadening the takeovers exception for both rights issues and dividend reinvestment plans may also make it possible for companies to conduct larger capital raisings, that may be constrained at present by the potential interaction with the 20 per cent takeover threshold. ASX also strongly endorses the discussion in the consultation paper on the importance of issuers taking steps to ensure that timely and full disclosure requirements are adhered to around any placement (or other capital raising) and that the pricing and availability of such an offer is fair for shareholders and in the best interests of the company. While all four ASIC proposals offer the scope to assist some capital raisings in circumstances where they may currently be constrained by the provisions being amended, we believe that further measures may be needed to provide flexibility, particularly for small and medium sized companies, to access capital markets in current circumstances. Page 2 of 6 Companies in this segment of the market are likely to find their ability to raise capital (both debt and equity) particularly difficult in the period ahead, as the Australian corporate sector seeks to fill a funding gap, that ANZ has estimated may be as much as $35 billion over the next two years. This competition for funds will present smaller companies with particular challenges as one of their main sources of finance (bank lending) has declined significantly in the recent times and the corporate bond market in Australia remains thin, implying that equity capital will be an increasingly important source of funding, even at current market levels. Larger companies are more able to tap into large institutional savings pools (eg superannuation funds) than their smaller counterparts. Placements have always been an important component of secondary capital raisings for companies, particularly for smaller companies. They are a flexible capital raising mechanism, that can offer more timely access to capital compared to, for example, a rights issue. As such, ASX agrees with the sentiment expressed in the ASIC consultation paper (in the context of discussing the proposal relating to listed managed investments) that “while heavily discounted placements may dilute existing members’ interests initially, an urgent capital injection may be in members’ best interest over a longer period of time.” We believe this is true, not only for listed managed investments, but is also particularly the case for small to medium listed companies. Making a capital raising offer to all existing shareholders on a pro-rata basis (the so-called ‘equality principle’) is a generally favoured option for companies, as it presents those existing shareholders with the opportunity to avoid any dilution of their voting rights and economic interests. Although companies would also recognise that placements can be useful to broaden a companies register, and tap important new sources of capital, in a way that pro-rata offers cannot. When a company’s capital needs cannot be met by existing shareholders, there is a need to balance the ongoing viability of the company against the desire of existing shareholders to avoid dilution. A limit on the amount that can be raised through a placement, without specific shareholder approval, is designed to reflect that balance. The question is whether the current turmoil in capital markets, and difficulty companies will have in accessing credit for the period going forward, means that the existing balance is no longer sustainable, at least in the short-term. The current volatile market conditions means that a premium is placed on raising capital quickly when an opportunity arises. The uncertainty attached to a more drawn out capital raising can adversely affect the risk associated with that company’s shares, and see it come under considerable selling pressure. In 2008, the total capital raised by placements was 10 per cent higher than that raised in 2007. Over the same period the amount raised via rights issues fell by 30 per cent. Page 3 of 6 Chart 1 highlights that, since the credit crisis started to really bite in the fourth quarter of 2008, placements have become an increasing proportion of total secondary capital raisings by companies. Chart 1: Quarterly Secondary Capital Raisings by Type ($bn) 30 1 25 6 20 1 6 1 2 15 2 2 2 1 1 1 7 1 10 3 6 5 5 3 3 4 15 1 1 3 3 5 1 7 1 8 7 6 5 4 5 4 0 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1* 2009 Placements Rights Issues Dividend Reinvestment Plans Other However, it is worth noting that the relatively strong growth in the value of placements in 2008, at a time of great volatility in capital markets here and abroad, was largely the result of a number of very large placements by Australian financial institutions late in 2008. Digging beneath the aggregate numbers presents a very different, and more troubling, picture around the capital raising prospects of medium and small companies. Chart 2 shows that while the number of larger companies (market capitalisation greater than $1bn) making placements in 2008 were around the same number who made placements in 2007, the number of smaller companies making placements was sharply lower. Chart 2: Number of Companies Issuing Placements (by Market Capitalisation Segment) 400 364 350 300 291 250 232 200 162 150 150 100 81 50 39 38 0 <$20m $20m-$100m $100m-$1bn >$1bn 2007 2008 Page 4 of 6 At the same time, Chart 3 indicates that the amount of placement capital raised by these larger companies in 2008 was around twice that raised in 2007, but the amount raised by smaller companies was down by more than 65 per cent. Capital Raised by Placements ($Abn) 25 23.0 20 15 11.8 10 7.9 5 2.7 2.5 2.7 1.2 0.5 0 <$20m $20m-$100m $100m-$1bn >$1bn 2007 2008 The average size of placements by companies making placements in 2008, was considerably lower, for all but the largest companies, when compared to the previous year. Average placement size ($m) Company Size 2007 2008 <$20m 7.4 1.7 $20m-$100m 10.8 8.0 $100m-$1bn 48.8 33.3 >$1bn 302.6 605.3 One issue that smaller companies have had with being able undertake placements, has been the 15 per cent limit on the size of placements before the company is required to hold an extraordinary general meeting (EGM) to seek shareholder approval to raise a larger amount. Holding an EGM can take considerable time (which can be particularly problematic at a time of volatile market conditions) and can be costly, particularly if the amount raised is quite small. About one-third of all companies that made placements in 2008, had shareholder approval to raise amounts beyond the 15 per cent limit. A further 25 per cent of companies raised amounts in the 10-15 per cent range. Smaller companies are more likely to need to raise capital above the current 15 per cent limit, as the actual dollar amount raised for these companies would be very small. Given the potential for the dilution of existing shareholders who are not offered the opportunity to participate in any placement, it is appropriate to consider the impact of any proposal for change on this group of shareholders. This needs to be balanced against the needs of the company to raise capital to ensure its ongoing viability. The capital raising conditions for smaller firms in the past year has been tough and this could be expected to continue for some time, given the impact the credit crisis has had on debt raising and the prospects for this sector to access bank finance. Page 5 of 6 Proposals have been made from time to time to amend the existing placements regime to make it easier and more cost-effective for companies, particularly smaller companies, to make placements of a size to meet their funding needs. For example, ASX has previously considered a model that would to allow companies with a market capitalisation less than $100 million to raise up to 25 per cent through a placement in one year, subject to a limit on the discount offered to those taking up the placement. Under that earlier ASX proposal, the placement would not require the company to hold an EGM, but shareholders would need to have provided a mandate for such a capital raising, usually through a vote at their Annual General Meeting. Such a mandate could be for a period of no more than 12 months and would normally be linked to a particular general purpose (for example, in the current environment it might be linked to retiring debt). A capital raising above the 25 per cent limit would still require specific shareholder approval at an EGM. ASX will continue to pursue with ASIC changes to ASX Listing Rules to facilitate such a proposal, as providing a meaningful response to the difficulties facing companies seeking to raise capital in a timely, efficient, and effective manner. We believe such a reform would be particularly beneficial to companies, and their existing shareholders, in the current difficult funding environment. It may also provide the opportunity to assess whether such an arrangement could usefully form part of the permanent capital raising regime in Australia. 6 April 2009 Page 6 of 6