Coronavirus - Impact on working capital and fundraising options - UK

• United Kingdom

• Coronavirus
• Corporate

02-04-2020

Background

The ongoing coronavirus pandemic is a public health crisis which has quickly developed into a deep economic crisis. Many businesses, particularly those in the retail, leisure and hospitality sectors, are facing a complete and indefinite cessation to operations. Globally, governments have implemented a variety of schemes to support businesses through the short term issues arising in this difficult economic environment. Much as in the aftermath of the 2008 financial crisis, when there was a real and pressing need for issuers to shore up their balance sheets and to deal with their immediate working capital requirements, we are as a firm already seeing similar concerns arising amongst the businesses we support.

Despite the scale of the economic support package that the UK government has introduced, there have so far been no moves to implement bail-outs of the type seen in 2008 when the government took significant stakes in a number of financial institutions. Instead, through loan schemes, such as the Covid Corporate Financing Facility (CCFF) and tax reliefs, the government is clearly seeking to address immediate liquidity concerns. The receipt of government support requires responsibility on the part of boards to ensure that they have independently done what they can to address their issues (for example, through suspending dividend payments and share buy-back programmes) and once the public health crisis recedes and the economy begins to function as normal, businesses are likely to want to remove these liabilities from their balance sheets (and free themselves of any associated restrictions) at the earliest opportunity.

As the coronavirus crisis continues to develop at pace, it is not yet known whether further support measures will be introduced by government or regulators either in the form of further financial assistance or the relaxation of certain regulatory burdens (for example, streamlining the process for obtaining approval of a prospectus by the FCA in connection with larger fundraises, relaxing the requirement for a prospectus when issuing 20% or more of a company’s issued share capital over a 12 month period and/or allowing qualified working capital statements on a temporary basis).

On 1 April 2020, the Pre-Emption Group announced that it would be recommending to investors on a temporary basis until 30 September 2020 that they consider supporting non pre-emptive issuances of up to 20% of issued share capital subject to certain conditions (see below).

In addition, corporate governance institutions, such as ICSA and the GC100 have already acted to issue updated guidance around the conduct of annual general meetings in light of the crisis and government has also indicated that it will enact measures to enable annual general meetings to be held virtually in light of social distancing and ‘lockdown’ conditions imposed on the general public, albeit that at the time of writing it is not known precisely what form these measures may take.

In considering how best to meet an issuer’s fundraising needs, the key issues that companies will need to balance will continue to be the size of the raise to be undertaken, the shareholder authorities required and how quickly the issuer needs to receive the proceeds.

Technical Considerations

0. Pre-emption Guidelines

We expect that most premium-listed Main Market and the majority of AIM quoted companies will have complied with the Investment Association’s (IA) Pre-emption Group Statement of Principles (PEGS) and sought the standard resolutions for the dis-application of statutory pre-emption rights at their last AGM. Whilst standard-listed and AIM companies are merely encouraged to comply, the guidelines are widely seen as best practice and there is a relatively high level of compliance. The IA allows the annual disapplication of pre-emption rights via resolutions which meet the following criteria:

Size:

• An issue of up to 5% of the company’s issued ordinary share capital for unrestricted purposes; and
• An additional 5% of the company’s issued ordinary share capital provided that the dis-application is only used in relation to a specified acquisition or capital investment which has been announced either simultaneously or in the last six months.

Duration:

The dis-application should last no longer than 15 months or until the company’s next AGM, whichever is sooner.

As an additional restriction, the IA stipulates that the general dis-application should not be used to issue more than 7.5% of the company’s issued share capital within any rolling 3 year period.

As such, companies seeking to raise funds to improve their working capital position or to bolster their balance sheets will likely have standing authorities to proceed with a non-pre-emptive issue of shares up to 5% of issued share capital, which can be used in full provided they have not issued more than 2.5% of their issued share capital under the general authority in the last 3 years. Companies should only use the additional 5% where they intend to make, or have made, an acquisition or significant capital investment within the last 6 months.

On 1 April 2020, the Pre-emption Group announced that, given the current unparalleled economic situation, it would be recommending to investors that, on a case-by-case basis, they consider supporting non pre-emptive issuances of up to 20% of issued share capital (thereby relaxing the requirement set out above). This recommendation will apply temporarily until 30 September 2020, when the Pre-Emption Group will reconvene to assess how companies and investors have responded to the additional flexibility granted and to review how it was used by companies. There remain no restrictions on seeking shareholder authorities for a specific fundraising transaction, which can be done at any time.

If the additional flexibility above is to be sought by companies, then they should:

• explain their particular circumstances fully, including how they are supporting their stakeholders;
• undertake a proper consultation with a representative sample of their major shareholders;
• as far as possible, carry out any issuance on a ‘soft’ pre-emptive basis; and
• ensure that the company’s management is involved in the allocation process.

In addition, as well as the disclosures to be included in a company’s annual report and accounts as outlined in the Pre-Emption Group’s Appendix of Best Practice in Engagement and Disclosure, any companies issuing up to 20% of their capital will be expected to disclose alongside any issuance information about the consultation they undertook prior to it and the efforts made to respect pre-emptive rights, given the time available.

As AGM season begins and in the context of a number of postponements and cancellations, companies will need to consider the timeline of any proposed fundraising and whether authorisations granted at last year’s AGM will still be valid. For those companies who haven’t yet circulated AGM notices but will shortly do so, then undoubtedly many will seek to take advantage of this relaxation in the PEGS in the resolutions they propose so as to give them increased flexibility to raise more funds on a non pre-emptive basis than would have otherwise been possible.

As well as relaxations to the guidelines applying to non pre-emptive issuances, there have been wider efforts to lobby the FCA to relax the LR9.5 restrictions on the level of discount to market price that can be applied in a fundraising without having obtained shareholder approval, currently limited to a 10% discount to market price.

0. General Meetings

Given the particular nature of the ‘stay at home’ social distancing measures implemented to combat the coronavirus pandemic, there have been ‘knock-on’ consequences for the ability of companies to hold general meetings.

In the last week, joint guidance has been published from ICSA, a number of leading law firms, the FRC and the GC100 which aims to provide practical assistance and guidance for companies in holding general meetings in the coming months. Whilst the guidance confirms that general meetings are possible in the current circumstances, it stipulates that:

• shareholders should not be permitted to attend general meetings in person and should vote by proxy;
• the Chair of a general meeting should use their powers (at common law and under the company’s articles) to prevent shareholders and their proxies from attending meetings in person;
• shareholders should appoint the Chair of the meeting as their proxy (given that other proxies will be unable to attend the meeting);
• there is no legal requirement for directors to attend a general meeting (other than to constitute a quorum where necessary – see below);
• provides suggestions on how a quorum can be established at the meeting (for example, two director/employee shareholders attending); and
• gives guidance on what to do where the venue for a general meeting becomes unavailable or inaccessible.

In addition, this problem has been acknowledged by government and they have announced that legislation to both facilitate companies to hold responsibly ‘socially-distanced’ AGMs, or to allow a longer-term deferral will be introduced as soon as possible. It remains unclear at the time of writing, however, to what extent any government measures will extend to general meetings which are not annual general meetings and therefore to what extent any relaxations introduced may assist companies in raising funds more quickly and efficiently.

0. Prospectus Rules

Since the coming into force of the Prospectus Regulation in July 2019, there is an exemption to the requirement to produce a prospectus in connection with the admission of shares to a regulated market, for issues of shares equivalent to less than 20% of a company’s issued share capital.

Given that the IA and other shareholder groups continue to apply the 10% limit outlined above strictly, the impact of this change for premium-listed companies has been minor, whereas, some standard-listed companies have been able to make use of it. As AIM is not a regulated market under the Prospectus Regulation, the 20% limit does not apply.

Structures

So what does all of the above mean when it comes to companies selecting fundraising structures to meet their capital needs quickly and efficiently in the current environment?

0. Pre-emptive offers

One potential fundraising structure is a rights issue or open offer. Being pre-emptive offers, there is no requirement to have passed the pre-emption dis-application resolutions discussed above and the maximum PEGS size limit does not apply albeit that, in most cases, pre-emption dis-application resolutions will nevertheless continue to be sought in order to be able to deal with issues such as fractional entitlements and overseas securities law restrictions in a pragmatic way. An issuer will also require shareholders to have granted the directors authority to allot the relevant shares, which is limited by IA guidelines to two thirds of issued share capital annually.

These structures do therefore allow for larger fundraisings and, as they usually involve the issue of more than 20% of an issuer’s issued share capital, they require the production of a prospectus with obvious consequences in terms of cost and the length of that process (including obtaining relevant regulatory approval of a prospectus before it can be published).

We expect to see an increase in the number of rights issues, as we did after the 2008 crash, but given that, owing to their size and what is involved, rights issues are a ‘once and done’-type of fundraising, we anticipate that they are more likely to be used: (i) by larger companies that may not have investment grade credit ratings, or be able to obtain them in short order, in order to be able to avail themselves of government-backed support schemes such as the CCFF; or (ii) in instances where the government insists on companies implementing some form of self-help first in order to qualify for additional government support (for example, the government has so far resisted calls from the airline industry to offer some form of bail-out and is instead maintaining the position that airline companies should first exhaust all avenues to raise cash themselves, for example, from shareholders); or (iii) by companies to refinance borrowings incurred through participation in government liquidity schemes in the short-term once the economy begins to return to normal and the extent of their longer term working capital requirements can be more accurately assessed (and also, where applicable, to free themselves to resume dividend payments and to undertake share buy-backs).

0. Non pre-emptive offers

On the other hand, issuers who require smaller amounts but perhaps need to receive the proceeds more quickly will tend to opt for a non pre-emptive secondary fundraising such as an accelerated bookbuild placing. Most commonly, the issuer will seek to use its standing shareholder authorities (described above), in which case the size of the fundraise is clearly limited to the size of the available shareholder authorities (or a maximum of 10% (or 20%  for those who are able to take advantage of the temporary flexibility now proposed by the Pre-Emption Group)). Given this, there is usually no requirement to produce a prospectus meaning placings can be quickly and less expensively executed.

If the issuer wishes to raise more funds than their standing shareholder authorities would permit them to (for example, because they have only recently taken 5% plus 5% shareholder authorities at their AGM or they do not have an AGM in the short term), and their working capital needs are so urgent that they cannot afford the time and risk involved in convening and holding a shareholder meeting specifically to approve the dis-application authorities required in connection with the fundraising, they may seek to use a cashbox placing structure.

These fundraisings are structured as non-cash issuances and, as a result, statutory pre-emption rights do not apply (meaning that there is no need for any dis-applications). Therefore, up to 20% of a company’s issued share capital can be issued in a cashbox placing without triggering the requirement to produce a prospectus; for AIM companies, as long as a public offer exemption applies, they can issue more than 20% of the company’s issued share capital in a cashbox placing.

However, cashbox structures have been controversial. Notwithstanding the legal structure of such transactions, the IA and other shareholder bodies still treat them as issuances for cash and therefore insist that they must comply with the limits on non pre-emptive share issues set out in PEGS. Whilst this has limited their attractiveness to premium listed companies over recent years, standard-listed or AIM companies who are not wedded to compliance with PEGS have nevertheless been able to make use of the cashbox structure. In 2018, nine issuers made use of this structure and a further seven in 2019 and already in 2020 there have been two cashbox placings and we know from our own experience that there are a number of issuers actively exploring them.

All issuers considering a cashbox placing should seek to consult with their major shareholders before proceeding and, in particular, Main Market companies should consider consulting with investor bodies as well (as well as observing the other conditions stipulated by the Pre-Emption Group when undertaking an issuance of up to 20% of share capital) . In the current extraordinary environment, investors and investor bodies, particularly now that the Pre-Emption Group has temporarily relaxed its Statement of Principles in relation to the size of pre-emption right disapplication authorities to allow for non pre-emptive issuances of up to 20%, may be willing to show greater understanding of companies’ funding needs and be prepared to cashboxes more sympathetically than may have been the case previously.

Conclusions

Over the coming months we are, therefore, likely to witness an increase in non pre-emptive fundraisings of up to 20%, making use of accelerated bookbuild placings and cashbox structures as smaller companies seek to shore-up balance sheets and cover their immediate working capital requirements quickly and efficiently. In addition, we are also likely to see companies with AGMs coming up in the short term seeking to take advantage of the new flexibility offered by the Pre-Emption Group’s statement on 1 April 2020.

As rights issues are much more significant capital raising events, they are likely to be used by larger, Main Market companies where they need to demonstrate some form of self-help to qualify for other forms of government support and intervention as well as to fulfil longer term financing or refinancing needs and may be pursued with more vigour later in the year, assuming a return to some semblance of normality in terms of economic and market stability, once companies have been able to assess their precise capital requirements going forward.