Equity Capital Raising in Australia During 2008 and 2009

Abstract

During 2008 and 2009 Australian listed entities raised large amounts of equity capital as the global financial crisis led to a significant tightening in credit markets. Over these two years listed entity after listed entity recapitalised, seeking additional equity to replace debt as lenders, unwilling to roll-over debt on pre-crisis terms, sharply curtailed the amount they were willing to lend. Adding to the need for equity raisings were the broader economic impacts of the crisis which reduced earnings and asset values leading to threats to banking covenants. Still more listed entities raised capital to address new-found equity market concern with high levels of debt, a far cry from the environment of 2006 and 2007 when listed entities were being criticised for their 'lazy' balance sheets as the private equity boom peaked.The focus of this paper is how that new equity capital was raised in Australia among S&P/ASX 200 entities in 2008 and 2009, the formal capital raising regime, the growth of a substantial 'informal' regime through the ASX waivers process and the resulting implication for investors. Listed entities in 2008 and 2009 sought capital from new and existing security holders and in many cases at substantial discounts which were arrived at through unclear means. At many entities, the lack of any formal protection for preemptive rights for existing investors under the Australian regime meant that many investors, retail and institutional, were powerless to prevent the dilution of their ownership interest.Just under $100 billion was raised by S&P/ASX 200 entities in 2008 and 2009 through 279 separate capital raisings. The capital raisings of Australian listed entities also made a meaningful contribution towards shoring up the balance sheets of investment banks as $1.89 billion in fees flowed from investors to investment banks – often in cases where it was not clear why such high fees were paid.This paper also proposes some changes to the Australian capital raising regime designed to make it more efficient and transparent while preserving the flexibility that served many entities well during the financial crisis.