(Bloomberg) -- The market rout may have brought mergers and acquisitions to a halt and put the market for initial public offerings in a deep freeze, but not all bankers are sitting idle.
A flurry of emergency share sales is keeping U.K. equity capital markets desks busy, and more can be expected now that a group of British institutional investors agreed to relax norms around fund-raising limits.
The response to the coronavirus outbreak has wreaked havoc on corporate balance sheets, spurring companies and their advisers to reach for previously little-used funding tools, with so-called cash-box placements the flavor of the month in London.
In the structure, a company issues new shares in return for preference stock in a cash-laden special-purpose vehicle set up by an investment bank, which recoups its commitment by placing the original stock with investors. By engaging in a stock swap, the issuer circumvents normal limits on how much cash it can raise in a share sale.
“We expect to see more companies look to raise funds urgently through a so-called ‘cash-box' placing,” said Claire Keast-Butler, a partner at law firm Cooley LLP. “A number of companies will likely need to access equity capital markets to strengthen their balance sheets in the coming weeks and months.”
Such deals have been used in the past to circumvent investor guidelines aimed at giving existing shareholders the first right of refusal. And although some of these transactions have received public censure from shareholders in the past, the Pre-Emption Group, which represents major asset managers, on Wednesday issued a statement recommending investors consider supporting issuances of as much as 20% on a case-by-case basis.
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Investor guidelines in Britain suggest share sales open to outside investors should be limited to 5% of a company's share capital, or 10% if it's to fund a specific investment.
Companies in the retail, hospitality, leisure and travel sectors are on top of advisers' lists for such fund raising, and some have already put their shares on the block.
Caterer SSP Group Plc's cash-box placement for nearly 20% of its capital, announced March 25, was the first since the equity rout began in February, and others have come to market since with smaller sales. Recruiter Hays Plc on Thursday said sold new stock representing 12.4% of its share capital for about 200 million pounds ($245 million), citing a sharp drop in activity due to the coronavirus epidemic.
Vehicle classifieds group Auto Trader Group Plc on Wednesday raised 186 million pounds from an intraday share sale of about 5% of its share capital.
Existing shareholders continue to get precedence, the newly relaxed norms notwithstanding. Holders of both SSP and Auto Trader were sounded out ahead of the placement, and as much as 60% of Auto Trader's offering was taken up by the company's existing investors, according to people familiar with the matter.
Under normal circumstances, shareholders would not be keen to forfeit the first right of refusal on equity raisings, but in these extraordinary times, investors are willing to give way for the sake of speed and keeping a company afloat.
©2020 Bloomberg L.P.
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