The rapid spread of SARS-CoV-2 has had a considerable impact on a global scale. Several companies have been adversely affected by the COVID-19 outbreak and are still reeling under the pressure of uncertainties around the current situation. The governments are taking significant steps to prevent the spread of this deadly coronavirus and ensure the safety of their people. Citizens are advised to stay back at home, and some geographies have adopted preventive measures such as partial or complete lockdown. Further, governments have put travel bans on international travellers.
Because of this outbreak, companies have also taken steps to prevent their people as well as the company itself from the long-run detrimental effects. Most of the companies decided to withdraw their guidance. Some cancelled the dividend and few raised capital to strengthen their balance sheet.
In this article, we would be looking at two companies that have raised capital to reinforce their balance sheet. These companies are oOh!media Limited and Qantas Airways Limited who have raised capital via equity raising and debt, respectively.
oOh!media Limited, an out of home advertising company, on 26 March 2020 announced several proactive initiatives to improve the financial flexibility and liquidity of the company in the present global macroeconomic conditions. These initiatives comprise of:
- The launch of a $167 million fully underwritten equity raising. The proceeds through this equity would be used for the repayment of debt & fund transaction costs.
- Material cost control measures would be taken with identified savings in the range of $29 million to $30 million in operating expenses. Fixed rent expenditure reduction would be realised over FY2020 based on the situation of the market.
- There would be a reduction of the Capital Expenditure program in between $25 million to $35 million, substantially below the guidance that was provided earlier ($60 million to $70 million).
- Amendment of the debt arrangements of oOh!media Limited to increase the gearing covenant to 4.0x Net Debt / EBITDA for CY2020. It reflects the formidable support of OML’s banking syndicate.
The initiatives taken by the company would help in strengthening the balance sheet as well as provide financial flexibility as well as liquidity with pro forma gearing declining from 2.6x to 1.4x net debt / FY19 EBITDA.
The company is of the view that it is wise to take up actions that enhance balance sheet flexibility, given the uncertain economic outlook.
Let’s look at the cost control measures and Reduction in CAPEX:
The company has already started the implementation of these Cost Control and CAPEX Reduction measures. There is a likelihood that additional measures would be implemented by the company depending on the severity of the coronavirus outbreak on the economy. OML also stated that once the prevailing situation recovers, some of the control measures would be reversed to ensure the business is best positioned to capitalise on both near and long term revenue opportunities.
Assistance from HMI Capital LLC for Entitlement Offer and Placement:
OML has received significant aid from its largest shareholder, HMI Capital LLC (HMI). HMI is an investment firm and has supported OML for a very long time. It has confirmed the subscription of its pro-rata share of the Entitlement Offer & Placement and committed to sub-underwrite up to $17.7 million across the Equity Raising which includes entitlement offer’s retail tranche. With this, the shareholding of HMI would increase from 19% to 25%. However, it would depend on the level of involvement in equity raising by other qualified shareholders and investors along with the required approval from the Foreign Investment Review Board for HMI to improve its holding over 20%.
Post the completion of the institutional component of the Entitlement Offer, OML would appoint Mick Hellman, the Founder and Managing Director of HNI to its Board of Directors as a Non-Executive Director and will also join the Board’s nomination and Remuneration committee.
In connection with the appointment of Mick Hellman, OML would nominate one current Director to resign temporarily from the Board of Directors and would take the position of Board observer.
Terms of Equity Raising:
Fully underwritten Equity Raising worth $167 million will result in the issue of fully paid ordinary shares. The process would be conducted through a placement to fully paid ordinary shares to raise ~$39 million and an accelerated non-renounceable pro-rata entitlement offer that will allow shareholders to buy one share of OML for one share they own at 7:00 PM Sydney time to raise ~$128 million.
The Equity raising will result in the issuance of ~$315 million new shares, which represent ~130% of current securities on issue.
Qantas Airways Limited
On 25 March 2020, Qantas Airways Limited (ASX:QAN) announced that it had finished a new round of debt funding where it had secured $1.05 billion in additional liquidity to consolidate its position as it manages through the explosion of COVID-19.
The Group has protected the debt against a fraction of its fleet of aircrafts that were acquired by the company through cash using cash recently. The loan has been granted for ten years at an interest rate of 2.75%.
With this debt facility, the company has an available cash balance of $2.95 billion along with an extra $1 billion undrawn facility remaining available.
The net debt position of the Group is towards the lower end of its targeted range of 5.1 billion. Further, the Group has no such major debt that is going to mature by June 2021.
With an additional $3.5 billion in unencumbered assets, Qantas has the flexibility to increase its cash balance as a wise step in the present scenario.
Apart from this, the company has taken various measures to lessen the activity levels of the company as well as the costs due to the extraordinary revenue impact of the Coronavirus pandemic along with related constrained travel Jetstar & Qantas passenger services.
Alan Joyce, the CEO of Qantas, stated that the company in the past couple of years strengthened its balance sheet because of which it can draw on that strength under this exceptional situation. Every step taken by the company is aimed at the long-term future of the company. It also includes ensuring its people to have a job when the company have work for them.
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