Firms with strong franchises have been the most successful in raising capital
Thursday 16 Jul 2020 Author: Ian Conway

So far this year UK companies have tapped investors for a record £15.7 billion of cash through 217 share placings, according to AJ Bell investment director Russ Mould.

‘The question for investors is whether this rash of fundraisings is a threat, an opportunity or somewhere in between,’ he says.

The answer to that question depends on who’s asking for the money. Firms with a strong proposition, and which are perceived to be ‘winners’, have used the crisis as an opportunity to steal a march on their rivals by bullet-proofing their balance sheets or building their war chests.

Those with a weaker franchise have had to go cap in hand to their shareholders often just to keep from breaching their banking covenants and remain a ‘going concern’.

BACK UP THE TRUCK

The biggest cash raise by far was global food service firm Compass (CPG), which snaffled up £2 billion at a slim 3% discount to its-then market price. It did so to strengthen its balance sheet and liquidity position, ‘reducing leverage to deal with the challenging environment and ensure the company remains resilient in the event of further negative developments in the pandemic’.

This was despite Compass scrapping its full year earnings and margin guidance, and already having £2.8 billion of committed credit facilities. Investors clearly bought into the story that the cash would be used to enhance its competitive advantages and consolidate its position, likely through acquisitions.

Also, as Mould observes, Compass is ‘at the top of the food chain and its smaller rivals don’t have the luxury of tapping the capital markets for billions in fresh liquidity’.

Another big cash raise was also in the hospitality sector, with hotel and restaurant firm Whitbread (WTB) gathering £1 billion of cash ‘to ensure that the company emerges from the pandemic in the strongest possible position to take advantage of its long-term structural growth opportunities and win market share in both the UK and Germany’.

Like Compass, Whitbread wasn’t exactly short of cash in the first place with £500 million in the bank and £950 million of loan facilities, but it grasped the opportunity to copper-bottom its balance sheet.

CARPE DIEM

Other firms have raised funds for specific growth opportunities, such as credit hire and legal services provider Anexo (ANX:AIM) which collected £7.5 million to buy up work in progress books from other firms and specifically to expand its litigation team to take on more VW emissions cases.

The firm’s Bond Turner legal business is already engaged in 8,000 cases, some of which were existing customers of the group and some of which are new. Chairman Alan Sellers believes the percentage of damages and costs accruing to Anexo could have ‘a significant positive impact on expectations for profits and cash flow’.

The VW case includes cars made by Audi, SEAT and Skoda, and the firm is now mulling backing customer claims against Mercedes which is also accused of cheating air pollution tests.

KEEPING THE LIGHTS ON

Many of the fundraisings have been for growth initiatives, but some have been out of necessity as firms have found their working capital requirements shoot through the roof, causing big cash outflows which aren’t being offset by inflows from revenues.

Sports car maker Aston Martin Lagonda (AML) raised nearly £700 million in fresh capital so that it could ‘successfully emerge from the extended lockdown and the dealers’ inventory de-stocking period’. This was after it warned it would lay off up to 500 staff to save a mere £10 million of costs. The shares are now trading well below the level at which it raised this new money in June.

Low-cost airline EasyJet (EZJ) tapped shareholders for over £400 million last month in order to help it withstand up to nine months of its fleet being fully grounded. EasyJet reckons it will burn through £1 billion of cash every three months so the £400m is just over a month’s outgoings. Again, its shares are trading well below the June issue price.

Anglo-American cruise operator Carnival (CCL) raised $500 million at the end of March at a massively discounted share price, alongside $4 billion of secured borrowing at an eye-watering 11.5% coupon and a further $1.75 billion of convertible bonds with a coupon of 5.75%, all for ‘general corporate purposes’ as its ships sit idle at quaysides around the world.

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