Ipo-Watch-Special-Edition-Dealing

IPO Watch Europe Special Edition Dealing with the impact of COVID-19 The coronavirus (COVID-19) pandemic has brought unparalleled economic stress. This special edition of IPO Watch has been prepared as a means of helping finance and management teams: • Think about COVID-19 circumstances and the impact those have on their business; • Consider their approach to managing liquidity constraints brought about by the COVID-19 disruption; • Gain a greater understanding of the fundraisings that have taken place during lockdown; and • Assess options for future sources of finance. The first quarter of 2020 saw low levels of IPO activity. While legacy Brexit uncertainty was beginning to dissipate, the quarter closed with the introduction of lockdown measures across the UK and much of Europe, driving a spike in market volatility and widespread economic uncertainty. In light of the ongoing effects of COVID-19, this edition of IPO Watch has a reduced focus on our more typical IPO analysis. However, it brings in additional analysis of the UK market’s Further Offer and Placing activity since lockdown, as issuers look to strengthen their balance sheet positions. We also comment on the changing regulatory environment and the market reaction to this as issuers have positioned themselves to access liquidity through the range of finance options available at this time. We anticipate further and deeper issuances to the market that will require increased reflection and assessment of corporate strategy in what will be a new market. We are acutely aware of the stresses that participants are dealing with at this time and are keen to be supportive. The market reaction since lockdown Lockdown fundraisings Investors call for enhanced scenario analysis due to As the COVID-19 pandemic began to develop, we saw COVID-19 recognition that – due to the unparalleled economic situation – As awareness of COVID-19 has developed, we have also corporates needed a fast-track route to market and there was witnessed an understandable desire from investors for fuller a need to raise more than the normal 10% pre-emptive limit. disclosure and analysis from corporates, who will need to explain their assumptions and scenario planning in more detail On 1 April, the Pre-emption Group (PEG) relaxed its non-pre- going forward. The bar is rising for the level of disclosure and emptive guidance limits to 20% to facilitate faster access to the sophistication of the models that investors require. funding, with certain safeguards. However, the level of uncertainty for scenario planning in the The chart of fundraisings over £10m on the London market current situation is high. This has brought intense challenges against the FTSE Index sets out a steady stream of for management and boards. In particular, the CFO and transactions. The £216m placing by SSP and a £22m placing finance teams have been under acute pressure to develop by Hotel Chocolat were some of the earliest transactions to the models to assess a range of potential scenarios. markets. The Compass Group placing was notable not only due to the fact that it was the largest in this period at £2.0bn We would also add in certain sectors, the sense of the severity but also included a retail component via the Primary Bid of the potential impact has deepened and the mood has investor platform which was the first to do so in the market. become more pessimistic about how circumstances will impact business. Furthermore, it will take time to determine Heading into May several rights issues were announced and what the future holds as everyone – businesses, markets and have since been closed, from the events business Hyve, the individuals – adapts. construction company Costain and Whitbread. As the year develops, the expectation is that there will be further rights Beyond the pandemic: An opportunity to reset issues for businesses with a capital need that is greater than Having addressed immediate liquidity requirements, financing 20% of share capital. However, most commentators are drivers will for some swiftly turn to value creation with views suggesting that the climate for issuance will become more being taken on financing requirements for the environment challenging. post-COVID-19 disruption. This ‘second wave’ is expected once the initial shock of the pandemic passes and market participants start to look to the equity markets to raise long- term capital for strategic initiatives and opportunities. Several of the recent equity raises have seen a Businesses with a strong and well-thought-through corporate “requirement for issuers to reset or renegotiate debt strategy appropriate for the new market will be best placed to financing terms. Directors have been faced with the capitalise on the opportunities that the recovery will present challenge of achieving a suitable level of headroom and to attract investor support. regarding covenants when negotiating new terms with lenders, balanced with the necessity for modelling a ’reasonable worst-case scenario’, required in conjunction with the working capital statement in the prospectus. My team has been supporting clients across a range “of sectors to help them understand and model the true An important factor in this has been the ability of the company to predict the rate of the downturn on the impact of the pandemic on their prospective financial business’ activities, the additional costs to the business, modelling and analysis. and the impact on reported profits for the period, as well as any ‘exceptional’ presentation of related costs, We leverage the latest academic models and emerging particularly concerning covenant requirements. experience with stress testing to understand the volatility and variation in forecasts, and run econometric impact It has also been critical for directors of companies assessments of likely scenarios in specific markets. Our accessing the equity markets to appropriately shape econometric models build on epidemiological modelling COVID-19-related disclosures in prospectuses under assumptions to help clients understand the potential new FCA guidance, enabling investors to form their impact of key macro factors. own view as to the depth of the ‘reasonable worst-case scenario’ based on newly permitted disclosures, often This translates into valuable operational driver analysis in conjunction with going concern disclosure in their for our clients’ business, across areas such as workforce, annual report. cashflow timings and other key metrics. John Reilly Alpesh Shah Director Partner UK Capital Markets Group Actuarial Risk – Financial and Risk Modelling 4 | A COVID-19 IPO Watch Special Edition | PwC Regulatory adjustments have opened participants’ access to equity markets With a focus on maintaining functioning, supportive capital Companies, however, are still required to ensure that a markets during the pandemic, pre-emption guidelines have detailed and robust process is in place to support their been relaxed, and the FCA has temporarily permitted specific equity story for placings, working capital and going concern COVID-19-related disclosures to be made in supporting clean assessments, and that appropriate disclosures are made, working capital statements. as required by regulation. Market participants are also being encouraged to recognise that, going forward, businesses may face material uncertainty around going concern. More companies than before may not be able to provide clean working capital statements. Pre-Emption Group Working capital statements The Pre-Emption Group has taken a pragmatic Responding to concerns expressed by market approach to supporting issuances by companies participants, the FCA published a ‘temporary revised of up to 20% of share capital. Compared to a rights approach to clean working capital statements’ issue (>20%), this provides an increased flexibility to allowing disclosure of key ‘reasonable worst-case’ businesses wishing to raise equity funding quickly assumptions in an unqualified working capital and in a simplified process. statement (a clean statement but setting out the specific COVID-19-related assumptions used in determining the reasonable worst case). Going concern, disclosure and viability Distributable reserves planning In its updated guidance on going concern A large number of the recent equity placings on considerations, the ICAEW said that – given the the public markets have been through cashbox potential impact of the COVID-19 pandemic – it is placings, which have typically been less than 20% – likely that the management of many more entities providing flexibility and rapid execution by avoiding than before will now consider there is a material pre-emption restrictions. Such cashbox structures uncertainty relating to going concern, effectively provide an opportunity for companies to create recognising this as standard going forward. distributable reserves for future returns to shareholders (rather than share premium for any The going concern considerations should be premium on the issue) and, particularly at this time, supported by regularly updated, detailed forecasts to absorb losses from impairments or otherwise. and such material uncertainties should be disclosed in the financial statements. It is worth noting that, although the pre-emption benefits are limited to a placing of less than 20%, the reserves benefits can be gained on an equity raise of any size. 6 | A COVID-19 IPO Watch Special Edition | PwC European and UK IPO trends Equity issuance activity in Q1 was completely stifled by two black swans: the

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