Equity fundraising to become necessity for SA firms, even if investors don’t like it
Company management teams will need to convince investors, who have generally punished stocks for attempting equity raising
SA is set to see a wave of equity fundraising as banks’ capacity to lend is under strain from rising bad debts, just as corporations are in need of funds to cope with the fallout from the coronavirus pandemic.
SA companies, unlike many of their global peers, have historically been averse to raising money via the stock market as investors prefer them to take on more debt. Banks have obliged.
But with coronavirus-related bad debts setting SA banks’ profits back by about a decade, the period of easy money may be drawing to a close.
“The economic environment is not going to be conducive (for lending) any time soon and debt levels will increase over the next six months,” said Simon Denny, head of Barclays SA. “I am surprised that SA is not seeing any major equity capital raises.”
He said the economic conditions were expected to trigger a round of equity capital raising from about December.
Company management teams, however, will need to convince investors, who have generally punished stocks for attempting equity raising.
In August, cement maker PPC’s shares nosedived as investors hammered it after a rights issue announcement. In July, Famous Brands backed away from plans to raise equity after its announcement provoked a similar backlash.
PPC declined to comment for this story and Famous Brands did not reply to an e-mail seeking comment.
“Generally, there is a higher level of resistance by shareholders for dilution,” said Richard Stout, Standard Bank’s head of equity capital markets for SA and Sub-Saharan Africa.
Banks’ pre-pandemic willingness to lend allowed many companies to create a short-term liquidity buffer, he said. But as those funds run out and they increasingly feel the pandemic's fallout, companies will need to raise equity from the fourth quarter and extending well into 2021.
The likes of Africa Rainbow Capital Investments and condiment maker AllJoy Food, have already signalled to investors that they will seek to raise equity in the coming months.
“Banks are getting risk averse, which will make several listed entities raise equity,” said Muhammed Naasif Darsot, CEO of AllJoy, which is pursuing multiple strategies to raise the capital needed to grow its business.
Africa Rainbow Capital, in a circular to shareholders on Monday, said it planned to raise equity to support investee companies and meet medium-term fund requirements.
Stock markets around the world have bounced back after tumbling in March on fears of a Covid-19-induced economic slowdown. The JSE is among the strongest performers with its benchmark index up 40% since a March 19 crash.
SA companies could capitalise on current high stock prices to raise money. But so far they have lagged behind international peers, with SA equity raising totalling just $1.3bn to the end of August.
Indian companies, meanwhile, raised $28bn throughout August, while in Australia companies raised $22bn, Refinitiv data showed, outpacing SA even after factoring in discrepancies in market capitalisation and the number of listings.
SA companies have essentially kicked the can down the road by not raising equity, said one international banker, who did not want to be identified.
“I think what we need is for the companies to see their third quarter [September end] performance. That is when they will realise they need to raise equity,” he said.
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