The “New Normal” Requires Measured Thinking
We are moving to a new phase of COVID-19 – corporates and capital markets have moved beyond the initial “panic” to assessing the path forward in the new economic environment. COVID-19 has had varied implications for individual sectors and companies, resulting in a widespread rush to raise capital and enhance liquidity – including ~$15 billion of equity capital raised by ASX-listed companies since late-March 2020. Most companies that have accessed debt and equity funding markets have not been in stressed situations. Rather, they have proactively sought to preserve financial flexibility in order to better navigate the uncertain economic outlook ahead.
With Australia and New Zealand moving towards re-opening their economies, it is prudent for boards and management to take a measured, holistic approach to their capital structure and financial risk management. In times of crisis or uncertainty, the conflicts between objectives are starker and the consequences of sub-optimal decision making more serious. Furthermore, advice on how to solve these issues may be conflicted, biased towards product strengths or positioned with seemingly limited alternatives.
“The winners and losers from Australia’s great pandemic capital raising rush are becoming clearer. This is a time for cool heads. Boards and their advisers that raise capital to buttress their balance sheets must be alive to the fact this inevitably involves some transfer of value.”
Australian Financial Review, 16 April 2020
Understanding the Pieces of the Puzzle
Funding decisions are complex, with many inter-dependent factors which require careful consideration. Failing to adequately assess all pieces can result in sub-optimal outcomes with long-lasting impacts.
Piece by Piece
Any liquidity or finance risk problem requires a bespoke solution that will depend on each company’s individual circumstances. There are numerous questions that boards and management should address to generate a plan that can best satisfy the conflicting objectives and deliver the best outcome.
- What are the potential scenarios over the next two to three years?
- What are the recovery pathways and what actions are necessary to make them happen? Can they be accelerated?
- What levers do we have (e.g. pricing, cost savings, dividends, capex, asset sales)?
- Are we assessing and regularly monitoring our key threats, vulnerabilities and potential opportunities?
- Have we pre-planned potential responses?
- How can we best position our business to take advantage of opportunities through this environment?
- What is the long-term debt and equity mix that best balances cost (capital efficiency) and risk (solvency, liquidity)?
- What degree of flexibility does our business require (in the short-term and medium-term)?
- Is there a different short-term requirement and how do we transition back to the long-term plan?
- What solutions can be explored with existing financiers?
- How can we maintain negotiating power with our financiers?
- Are there other alternatives (structures and/or sources of capital) which are “fit-for-purpose”?
Objective, knowledgeable and insightful advice is critical in challenging times.
For over 30 years, Australian corporates have trusted Grant Samuel to piece together the funding jigsaw.
- If equity is required, how much is necessary?
- What are the alternatives to de-risk an equity raising?
- How do we maintain standards of shareholder fairness and transparency in structuring an equity raising?
- What are the attitudes, requirements and limitations of our stakeholders (e.g. shareholders, financiers, customers, suppliers, employees)?
- How should engagement with stakeholders be sequenced and managed to optimise the outcome?
- How can we get real-time insights from the full range of market participants?
- How do we preserve flexibility to access capital markets when they are available?
- How can we limit market risk exposure for our funding requirements?
- Have we fulfilled our fiduciary obligations?
- How can we balance the competing objectives and interests of the various stakeholders?
- What are the potential long-term legacies of our actions?