Tidy up time - Corporates focus on balance sheet as economy worsens

Data InsightECM Pulse 14 July

Tidy up time - Corporates focus on balance sheet as economy worsens

Companies across sectors are being urged by banks and investors to rebalance away from debt and towards equity amid a slowing global economy and rising borrowing costs, sources tell ECM Pulse.

In recent days, German wind turbine maker Nordex [ETR:NDX1] and real estate company TAG Immobilien [ETR:TEG] became the latest companies to announce rights issues.

While TAG’s deal refinances an acquisition facility linked to the purchase of ROBYG SA, the company cited a need to strengthen its “equity base” which will support its investment grade ratings.

Nordex says the aim of the rights issue is to “strengthen its capital structure by increasing its equity ratio in the current volatile environment for the wind industry.”

Both deal announcements follow last week’s news that German utility Uniper [ETR:UN01] may require a government bailout, having struggled to manage its dependency on Russian gas since the beginning of the war in Ukraine.

In late June, Autocar reported that Aston Martin [LON:AML] was pondering a GBP 200m-plus equity investment given that its GBP 1.2bn borrowings hindered further debt raising.

Year-to-date, around USD 7bn has been raised in EMEA through follow-on deals with the specific purpose of debt repayment, according to Dealogic data. While the number per se may not impress, it is more meaningful when put in perspective against the overall minute deal flow.

It means at least 9.2% of all EMEA ECM issuance so far in 2022 has been primary capital raises used for debt repayment, well above the norm for the decade and in line with the level during the height of the COVID-19 pandemic in 2020.

The figure will likely be an underestimate as it does not include deals earmarked for “general corporate purposes” nor primary capital raises where companies raise equity for M&A but end up upsizing to allow for a cushion against any economic downturn.

In an increasingly worsening economy, balance sheet capital is becoming “extremely topical”, according to an ECM banker who added there is whole host of companies looking at launching capital raises just after the summer break.

“Many investors would rather see companies go and raise capital early, when they can do it, rather than when they are forced to because of the economy,” he said.

Investors are prepared, with one buysider at a large institutional investor saying Uniper’s announcement made “a lot of sense” given the pressures on the company.

“The second half of the year will be skewed towards restructuring, and I think the list of companies is going to be much broader than people expect,” he said noting he is now spending most his time looking at corporate balance sheets.

The banker agreed that a broad swathe of companies will be affected by growing capital needs, pointing to infrastructure, real estate, utilities and travel as sectors feeling pressure on balance sheets.

The e-commerce sector, once the darling of EMEA ECM, is likely to be a key thematic again in the market soon, but for rescue rights issues rather than unicorn IPOs, the banker added.

“There is no systemic risk to any one sector, unlike banks during the great financial crisis, but there are plenty of companies across industries with the wrong capital structure,” said a second banker.

Reluctant to raise

Rights issues can be notoriously painful, particularly in jurisdictions where shareholders cannot oversubscribe to shares, a feature which is hugely helpful in Spanish, Portuguese and French cash calls.

The difficulties experienced by the banks underwriting Saipem’s [BIT:SPM] rights issue in Italy, completed this week, will undoubtedly still be fresh on the minds of many come September.

Only 70% of the EUR 2bn deal was subscribed for, with banks left with a large chunk of stock following two underwhelming rump auctions on 12 and 13 July, as first reported by this news service. Purchasers have until 2pm CET on 14 July to exercise those rights.

If all rights taken up are exercised, banks will still have to stump up around 20% of the EUR 2bn rights issue, roughly EUR 400m, illustrating the difficulty in getting a deal across the finish line in volatile times.

Because of such difficulties, several clients are waiting until at least the publication of Q2 results to go ahead with a deal, in hopes that the global economic picture is not as severe as some fear, according to three bankers.

“Many companies have not realised a recession is coming, and some are just not thinking about balance sheets given the huge number of day-to-day operational issues they have to deal with,” said one banker. “But this means there is going to be a rush of rights issues post summer and companies with real difficulties are going to have to hit the market alongside those refinancing M&A facilities.”

“If you are in a situation where your share price has dropped massively it makes things very tricky.”

Difficult decisions lie ahead.

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