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British companies are starting to raise equity to shore up their balance sheets to cope with the impact of the coronavirus pandemic on their operations, which has left many of them reliant on borrowing to meet expenses.
In the last two weeks alone, 11 London-listed companies have raised £573 million ($661 million) in equity, according to data from Dealogic.
Airport food and beverage concession operator SSP SSPG, +3.86%, fashion company Joules JOUL, +3.79%, and online car marketplace Auto Trader are among those businesses that have raised cash to tide them over during difficult times, and potentially put them on a more stable footing once the coronavirus crisis has subsided. The figure from Dealogic doesn’t include SSP.
On Monday, WH Smith SMWH, +8.31% said it is preparing to place 13.7% of its shares, worth approximately £150 million. In addition, the FTSE-250 books, newspaper and stationery retailer said it secured new lending facilities of £120 million ($147 million) — which is dependent on the share issue — to strengthen its balance sheet, working capital and liquidity position.
“These financing arrangements, coupled with a broad range of mitigating actions to manage the cost base and cash flow, will provide sufficient liquidity to deal with this most challenging of trading environments,” the company said in a statement.
Shares in WH Smith were trading up 3.07% at 11:24 a.m. GMT on April 6.
The news comes just days after Hays HAS, +4.13%, one of the world’s biggest recruitment companies, raised about £200 million ($248 million) via a new share issue after the company said the virus crisis had driven a “very material deceleration in client and candidate activity.”
“We think that Hays is a solid, cash generative company. We think that the balance sheet is now protected, even in a worse-case scenario, and Hays will be well positioned to consolidate its position,” analysts at Liberum wrote in a note on Monday.
Shares in Hays, which have fallen more than 45% since the start of the year, were up 4.89%.
“Raising extra cash is becoming increasingly popular with companies as a way to shore up their balance sheets and given them a better chance of navigating through the crisis. It’s unfortunate that existing shareholders will be diluted by such fundraising, but that’s the price to pay to ensure the business can survive,” Russ Mould, investment director at AJ Bell said.
Last week, industry body the Pre-Emption Group (PEG) said existing investors in U.K.-listed companies should be allowed to buy a bigger share of rights issues to help make it easier for firms to raise cash amid the coronavirus pandemic.
“In order to help companies raise equity capital in these difficult circumstances, the Pre-Emption Group recommends that investors, on a case-by-case basis, consider supporting issuances by companies of up to 20% of their issued share capital on a temporary basis,” the group said in a statement on Apr. 1.
Under current “pre-emption” rights guidelines, existing investors have first refusal on up to 10% of a rights issue in proportion to what they already hold. However, some companies have increased there share count by up to 20% using cash box structures that allow them to bypass pre-emption best practice.
Commenting on the statement from PEG, Andrew Ninian, director for stewardship and corporate governance at the Investment Association, said: “We welcome the Pre-Emption Group statement providing additional flexibility on their guidelines in light of COVID-19,” Ninian said.
He added: “Investors want companies to be able to access the capital they need at this difficult time. This statement lays out clearly the steps companies will need to take to make use of this flexibility and to respect their existing shareholders.”
As companies look to bolster their balance sheets by raising equity, this might present an opportunity for private-equity firms.
PIPE investments — private investment in public equities in UK listed companies — have generally been uncommon, but can now provide an alternative source of funding for businesses that are trying to weather the current crisis.
Paul Dolman, head of private equity and financial sponsors group at law firm Travers Smith, said they have had a number of inquiries for such transactions, which allow private investors purchase common stock or preferred stock that is convertible to common shares at a predetermined price.
He said he “saw these PIPE transactions, which are common in the U.S., become an important source of funding in the UK following the 2008 financial crisis,” and “given that there are a number of public companies that need cash” he believes they could come back.
