CAPITAL MARKETS CAPITAL RAISING & COVID A capital time to tap In part one of thits twho-peart smeries, Baakerr MkcKenzite lsawyers outline how equity capital markets have come to the rescue of listed companies struggling with the ongoing liquidity crisis ver the past few months, global stock markets have experienced high levels of MINUTE volatility and general uncertainty in light of READ the economic disruptions caused by Covid- 19. The unprecedented nature of the cOoronavirus pandemic and its impact on global economies Against the backdrop of the makes it difficult to predict with any certainty how long human tragedy the ongoing Covid-19 will continue to meaningfully affect financial pandemic has brought, markets. This provides challenges for many listed companies many companies are facing that need to raise capital in the short to medium term, their own battle for survival. particularly those that require funding on an urgent basis to The mandatory closures, meet upcoming debt or other contractual commitments, or sheltering and reduced to simply satisfy ongoing working capital requirements with consumer demand from the insufficient other sources of liquidity. As the United States Covid-19 pandemic poses Federal Reserve chair Jerome Powell recently cautioned: challenges to corporate “The recovery may take some time to gather momentum, revenues and even business and the passage of time can turn liquidity problems into viability, triggering the solvency problems.” Notwithstanding stock market volatility, furlough or redundancy of the equity capital markets provide a number of options that tens of millions of people many companies will be eager to explore, including private while others work under investment in public equity (PIPE) and follow-on equity radically altered offerings. circumstances. In this first of a two-part series covering Private investment both equity and debt As liquidity concerns have crystallised and come under markets, Baker McKenzie additional scrutiny, businesses are finding it more difficult lawyers consider how equity to secure conventional sources of funding in a timely manner. capital markets have been One possible solution for listed companies seeking to raise coming to the rescue of capital and boost balance sheets may be a PIPE transaction. listed companies struggling Such transactions, in which common or preferred shares or with the pandemic-driven convertible debt, in some cases with warrants, are issued at liquidity crisis. a set price to investors, allows the issuer to raise capital not otherwise available in the public markets. It can do this more quickly and cost effectively than other more heavily regulated means of equity capital raises, such as public offerings. SSPPRRIINNGG || IIFFL R ..C O M | CAPITAL MARKETS CAPITAL RAISING & COVID and, for foreign investors, notification and The equity capital markets provide a approval considerations under the Committee on Foreign Investment in the number of options that many companies United States (CFIUS) regulations. See our article PIPEs unblocked, finally? , will be eager to explore previously published in IFLR, for further discussion on PIPEs. In some jurisdictions, PIPE investments the structuring of PIPEs. In those Existing shareholders asked are often coupled with pre-emptive offers to jurisdictions, PIPEs have historically only to dig deep existing shareholders to give such investors been used by troubled small-cap companies While shareholders typically hope to enjoy the opportunity to provide some of the with limited options to raise capital through the benefits that owning a stake in a required funding and avoid significant traditional financing options (such as company can bring, the flipside is that, dilution of their shareholdings. PIPE deals underwritten public equity offers, debt and during times of financial stress, they may be may present a number of advantages to convertible securities offerings, and bank called upon to support the business by issuers such as the speed in raising capital finance). injecting further capital to help ensure a (possibly one to two weeks depending upon One particular challenge that a company company remains viable and able to continue jurisdiction), lower transaction expenses may need to address when structuring a trading. We are now beginning to see a wide than public offerings, streamlined pre- PIPE relates to any hedging element. When range of companies making calls on existing transaction disclosure materials (or stock markets began their precipitous fall in shareholders via a variety of follow-on equity potentially no such disclosure materials, March, several countries, including Austria, offerings (also sometimes referred to as depending on jurisdiction) and failed Belgium, France, Italy, and Spain imposed secondary capital raisings, although these transactions not impacting the market, as temporary short selling bans. Although such usually involve the resale by a shareholder of transactions are disclosed only after bans were lifted as markets stabilised, they its existing securities). These include rights definitive investment commitments. could potentially be reimposed in the future. offers, open offers and placings, although the PIPE deals are commonly used in a If the structure of the PIPE has a hedging exact terminology and options available will rescue situation or when market prices do element (for instance, as a convertible bond vary between jurisdictions. not fully value a company. They often or warrant) then consideration will need to Globally, the number of follow-on involve relatively short-term investors who be given as to whether there is a ban on offerings increased 20% from 1,805 in the will look for a clear exit route. Private equity short selling of the issuer’s stock, and what first quarter of 2019 to 2,174 in the first investors often seek, and in some cases will exceptions may be available. quarter of 2020, with the proceeds raised require, influence over management (such as In other jurisdictions, PIPEs have been rising 34% to $172.88 billion. During Q1 by obtaining board representation and a longstanding feature of the markets – for 2020, there was a steady rise in the number possibly seeking anti-dilution or negative example, in the US, the size, diversity and of offerings and the proceeds raised. control rights). In some cases, companies volume of PIPEs increased dramatically As time has passed and the scale of the have used a PIPE as a defensive tool with during the global financial crisis of 2008- health crisis and its economic impact have the addition of a substantial investor with 2009 and we are again witnessing a become clearer, companies have been in rights to board representation aligned with significant spike in the wake of Covid-19. greater need of capital and liquidity. The result existing management creating additional In the US, there is a relative lack of of this is that global issuance volume rose to confidence in the company’s leadership. For restrictive regulation for PIPEs, particularly 1,028 in May 2020, with total proceeds rising some issuers, PIPEs may be seen as a last resort given the pricing discount often entailed and because they may provide We are now beginning to see a wide range governance rights for the investor that a company does not want to relinquish. of companies making calls on existing The regulation, and thus the use, of PIPEs varies between jurisdictions. In what shareholders will be one of the first UK PIPEs in more than a decade and a possible sign of things to come, it has been announced that the private for companies whose charters authorise so- significantly, to $129.54 billion. This investment firm Clayton Dubilier & Rice is called blank check preferred stock. The represents an increase in proceeds of 44% investing in the London Stock Exchange- primary considerations include certain from $90 billion from 835 issues for the listed building products supplier SIG. stock-exchange mandated shareholder previous month, with total proceeds more In some jurisdictions, including much of approval for issuances at or above 20% of the than doubling from the $59.45 billion from Europe, investor sentiment is traditionally outstanding voting stock or certain insider 736 issues recorded in May 2019. opposed to non-pre-emptive offers that participation, a notification requirement In the UK, the most common structure dilute existing investors, and there may be under the Hart-Scott-Rodino Antitrust adopted by companies with premium significant legal hurdles and institutional Improvements Act of 1976, for issues above listings which have undertaken pre-emptive investor guidelines issues that complicate a certain level (approximately $94 million) secondary capital raisings in recent years # | IFLR.COM | SPRING CAPITAL RAISING & COVID CAPITAL MARKETS Follow-on offerings 1,200 150,000 1,000 120,000 800 90,000 600 60,000 400 30,000 200 0 0 r r y y v t c c r r g p b b n l a a a a n n c o e e p p u e e e u u a a F M A M J N D M J J A S F M A O J D 2018 2019 2020 Proceeds ($M) Number of issues Source: Refinitiv Nil paid rights entitle the holder to than would be the case for a rights issue. An As time has passed subscribe for the new shares being offered open offer is again made to shareholders on by the issuer at an offer price, which will be the register of members at the record date and the scale of the set at a – usually significant – discount to the but, in contrast to the nil paid rights issued market price to encourage takeup. Rights are in a rights issue, an open offer entitlement health crisis and its also separately tradable securities, so even cannot be traded. Except in very rare cases, shareholders who do not participate can shareholders who do not subscribe for new economic impact extract some value by selling the rights on shares in an open offer do not receive market during the offer period and so be compensation and are also diluted.