Sooner or later: market turns attention to equity financing for stricken corp

Data Insight ECM Pulse 6 October

Sooner or later: market turns attention to equity financing for stricken corp

With Porsche’s show out of the way, advisers are now focusing on corporate balance sheet recapitalisations to ride through the deteriorating economy. But as share prices decline, some companies will have to pull the deal trigger soon or risk missing their window to raise equity.

In September, UK luxury car manufacturer Aston Martin [LON:AML] completed a GBP 584.98m cash call, proving that investors are stepping up to support names with chequered equity track records. But not all companies have been able to tap shareholders to fix their balance sheets.

In July, UK e-commerce company Made.com [LON:MADE] announced a profit warning. Come August, Made confirmed it was studying a GBP 50m capital increase to strengthen its balance sheet. By September, it had announced that conditions were not conducive for an equity raise.

Made.com’s now negligible market cap, standing at just over GBP 20m at the beginning of October, makes a GBP 50m raise impossible, said an ECM banker, noting the company had missed its opportunity to finance through equity.

“We have all said it before, but you want to trade when you can, not when you have to,” said a second ECM banker. “It is hard to get a board to do a raise, given where stock prices are at the moment, but the problem is if you wait too long you look back and realise you should have gone earlier.”

Made.com has clearly missed a window to raise capital, agreed a third banker. By contrast, Ocado’s [LON:OCDO] GBP 576.2m equity raise in June is an example of an issuer “getting on” with a deal when it needed to, he added.

Made.com is now exploring several strategic options to turn itself around, including a potential sale.

The UK e-tailer blamed a drop in discretionary consumer spending as a driver of its misfortune. The company is not alone in being affected by a drop in expenditure as customers tighten belts in the face of macroeconomic turmoil.

In its most recent Weil European Distress index, law firm Weil, Gotshal & Manges cited the retail and consumer industry as the most distressed corporate sector in Europe. Both bankers and investors speaking to the ECM Pulse in recent weeks have cited e-commerce companies as particularly vulnerable due to lack of revenues.

“I think once these e-commerce companies get into a negative spiral it is hard to stop, as there is no floor to those valuation levels and no price that is too cheap to ignore,” the third banker said. “The minute you lose the confidence it breaks, and it breaks hard.”

This news service has previously reported that UK e-tailer Asos [LON:ASOS] and Germany’s Delivery Hero [ETR:DHER] are considered likely candidates among e-commerce companies for capital raises.

Made.com did not respond to requests for comment.

Banks next in line

Alongside online retailers, a few cyclical names could hit the European rights issue trail before the end of 2022.

 Italy’s Banca Monte dei Paschi [BIT:BMPS] is still hopeful of completing a EUR 2.5bn capital raise this year, and might be joined in the market by Credit Suisse [SWX:CSGN] after sources told this news service this week that potential underwriters are preparing their pitches.

Credit Suisse did not comment when questioned by this news service, but a source told the Financial Times earlier this week that the bank’s low share price is an obstacle to a rights issue.

In August, Deutsche Bank [ETR:DBK] analysts said the Swiss bank faced a USD 4.1bn capital gap, but for Credit Suisse to raise close to the CHF 4.2bn it did during its last rights issue in 2017 it would have to dilute itself by 38%, given its CHF 11bn market cap.

Should the bank’s share price fall further, a possibility given recent violent moves in the stock, a rights issue would be even more painful, a dilemma for the Swiss bank’s board to consider carefully.

Credit Suisse has largely underperformed European peers in the last three months, trading down around 20%. UBS Group [SWX:UBS] is roughly flat over the same period as is Deutsche Bank. Société Générale [EPA:GLE] is up around 7% over the last three months and UniCredit [BIT:UCG] has grown in value by over 11%.

CS has its 3Q22 earnings call on 27 October, at which point it is expected to reveal its next step.

Market volatility has also prevented some shareholders from chipping in in cash calls, as it was the case with Italy’s Saipem [BIT:SPM]. Banks must instead find new investors to backstop deals.

In Aston Martin’s case, Saudi sovereign wealth fund PIF came in as a new reference shareholder. Sources close to the BMPS rights issue also say that their time is predominantly spent trying to find new investors, including financial services companies and strategic partners of the bank.

The new shareholder search has been so extensive that bankers have compared the process to an IPO, with the underwriting syndicate tasked with selling a reset and an almost entirely new equity story to fresh investors, rather than relying on the shareholder register.

Nonetheless, sources speaking to the ECM Pulse remain positive that investors are still supportive of companies seeking to be front footed in raising equity capital.

But there are fears that some corporates may wait until it is just too late.

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