Capital raising is an important part of a business to continue to its growth trajectory, function as a going concern, fulfil its working capital requirements, execute specific transactions such as acquisitions, project financing etc.
Three things to look for during a capital raise:
Businesses have a plethora of options to raise capital, however, the business position of the organisation also plays an important role in selecting the source capital raising, and some sources of financing might not be open to every business.
Source of financing includes equity financing and debt financing, including bank facilities, IPO, stake sale, secondary issue, convertible note, secured note, unsecured notes, subordinated debt, preferred capital etc.
Causes & Timings
Businesses mostly raise additional capital to fund specific transactions. However, there could be several other reasons as well, including improvement in liquidity, repayment of debt etc.
In secondary equity financing, the favourable time to raise capital for a company could be when its share prices are trading at higher levels, as it allows companies to raise more capital with the same number of new shares compared to when its share prices are tracking lower than normal.
In debt financing, the favourable time to raise capital could be when the interest rates are lower and when the company has received an upgrade from credit rating agencies.
Cost of Capital
Cost of capital is defined as the rate of return foregone while making a specific investment or the rate of return that could have been earned by investing in any other investment with similar risk. Moreover, the cost of capital is the rate of return required to persuade an investor to the given investment.
Let’s discuss two stocks involved in capital raising activities:
Suncorp Group Limited (ASX: SUN)
Suncorp operates a network of brands offering banking, wealth and insurance solutions to the customers in Australia & New Zealand. In Australia, the group operates with CIL Insurance, Vero, GIO, Shannons, Teri Scheer, Apia, AAMI and Essentials by AAI. In New Zealand, the group operates Vero, AA Insurance and Asteron Life.
On 11 November 2019, the group has launched new capital notes offer to raise $250 million through the offer of Suncorp Capital Notes 3. The latest notes would be mandatorily convertible, unsecured, fully paid and subordinated. Distributions on Capital Notes 3 would be on a floating rate, discretionary, non-cumulative, expected to be fully franked with a quarterly payment.
Offer Structure (Source: SUN’s Capital Note 3 Presentation)
The distribution rate would be equal to the sum of 3-month Bank Bill Rate plus the margin, multiplied by (1 - corporate tax rate). The proceeds of the offer are expected to fund the capital needs of one or more regulated entities within the Suncorp Group along with general corporate funding, including the partial refinancing of Suncorp convertible preference shares (CPS3) issued in 2014 through the Reinvestment Offer.
The group has an option to convert, redeem or resell the CPS3 on 17 June 2020, and the group would consider all options for the CPS3 that would be not be reinvested in Capital Notes 3 on 17 June 2020, depending on various factors.
Under the offer, the eligible CPS3 holders could apply to reinvest all or some of their holding to Capital Notes 3. The holders eligible for the reinvestment offer would be issued one Capital Note 3 for every CPS3 reinvested along with quarterly dividend payment on 17 December 2019, subject to the payment tests according to the CPS3 Terms and Conditions.
The reinvestment offer has been facilitated, following the amendments in terms of CPS3. Further, if the issue date is different to 17 December 2019, the amendments allow for a pro rata dividend payment to those holders participating in reinvestment offer.
On 12 November 2019 (AEST 01:08 PM), the SUN stock was trading at $13.340, down by 1.331% relative to the previous close.
EML Payments Limited (ASX: EML)
A global FinTech business, focussing on delivering a safe and secure payment solutions to its customers, has offices in North America, United Kingdom, Australian, and Europe.
On 11 November 2019, the company launched equity capital raising activity, among other financing to fund its acquisition of Prepaid Financial Services (Ireland) Limited (PFS). The company is set to acquire PFS for an enterprise value of £226 million or $423 million at a conversion rate of 1.87 in GBP/AUD.
The company is funding the acquisition through:
- A fully underwritten entitlement offer to raise approximately $183 million.
- A fully underwritten placement to institutional shareholders to raise approximately $67 million.
- A new fully underwritten multicurrency debt facility of $175 million.
- Share based consideration to continuing PFS management of approximately $77 million.
The fully underwritten equity raising includes the entitlement offer seeking to raise $183 million, and placement to raise $67 million. As a result, the company is expecting to issue approx. 70 million new EML shares under the equity raising. The offer price for under the equity raising is $3.55 per new EML share, representing a 7.3% discount to the closing price on 8 November 2019.
Under the placement, the company is expecting to issue 19 million shares to new and existing shareholders at $3.55 per share. The shares issued to the holders under the placement would not be a part of the entitlement offer.
The company has invited eligible institutional shareholders to participate in the institutional component of Entitlement Offer, which is scheduled for 11 November 2019 and 12 November 2019.
Also, the institutional entitlements are not eligible for trading on the ASX or being transferred. Pending entitlements upon the close of offer would be offered to the existing institutional shareholders.
The company has invited retail shareholders from Australian & New Zealand to participate in the retail offer. The eligible retail shareholders would be offered at a similar issue price of $3.55 per new share, and the offer is opening on 18 November 2019 with a scheduled close on 29 November 2019.
FY 2020 Outlook
Concurrently, the company provided the FY20 Outlook, excluding PFS, revealing that it is on track to deliver 28-43% EBITDA growth along with:
- FY20 revenue guidance between $116 million to $132 million.
- FY20 EBITDA guidance between $38.5 million to $42.5 million.
- FY20 NPATA guidance between $26.2 million to $29.4 million.
- FY20 operating cash flow guidance between 70% to 80% of EBITDA.
The EML stock last traded at $3.830 on 8 November 2019.
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