Although it is the first among the ASX top 50 companies to fire the liquidity gun, there will be other vulnerable companies, both large and small, to follow if the global financial crisis provides any guide.
During the GFC, there was a tendency for companies to hold off raising cash in the early stages in the hope they could make it through.
Cochlear could be the first trial ahead of a deluge of companies seeking equity capital.
Go in early, get a better deal
But if there are lessons to be learned from the 2008-2009 period, when businesses raised more than $160 billion in equity, it was that those who went to sharemarket investors early got a better deal.
As share prices continued to fall, companies had to increase the number of new shares offered during rights issues and placements, and the discounts of their offers to the prevailing share price got steeper. Those that went to equity markets early received a better reception from fund managers, despite the fact that the first round of GFC raisings came from heavily-indebted property companies.
According to an ASX study during 2009, over half of all ASX-listed companies raised some additional equity capital. “Of the top companies, around 80 per cent of S&P/ASX 200 index companies raised capital, and they accounted for around 90 per cent of the total amount raised,” the study found.
It also noted that “issue discounts required to attract investor interest did widen in 2008 and 2009 to counteract reduced investor risk tolerance and reduced market liquidity”.
As the GFC became more prolonged, fund managers became more discerning about which equity issues to support.
‘It all comes down to price’
At this point, fund managers say the door will be open to equity raisings, but as one senior operative said, “it all comes down to price”. Cochlear is looking to get its issue away at a 16.7 per cent discount to the last trading price – which in this environment is not especially steep.
The additional problem for investors when deciding whether to support a capital raising is the inability to estimate valuation. One commented that he had never seen such a deluge of companies walking away from their profit targets, noting that when this is thrown in with an oil shock it makes forecasting very tricky.
For some companies that have been in the first wave of coronavirus casualties it may be too late to access the markets. Others will hope that the range of government measures to flood the system with cheap debt and support workers will be enough to tide them over until demand recovers.
Where the GFC was more a financial crisis, coronavirus has created a financial, economic and health crisis. As such it has spread beyond the first wave of corporate casualties in areas like education, travel and leisure.
Retail, services, manufacturing, construction media and even mining companies are now scaling back operations in response to government distancing rules.
The companies most stretched will be those with high fixed costs and shrinking revenues. And plenty fit that description.
To date, Cochlear is the first of the large cap companies to hold out its cap. Ooh Media and Webjet are taking the temperature of investors in the hope of securing funds, but neither seems to have yet sealed a deal.
For fund managers, more so than ever, it will be an exercise in picking winners and avoiding losers.
Elizabeth Knight comments on companies, markets and the economy.