Posted: 29 Jun. 2020 5 min. read

Capital raisings and defensive strategies during COVID-19

We interviewed Australian corporate heads of M&A and identified key trends influencing deal activity and the expected impact of COVID-19 to their business in 2020. You can download our full The deal in focus report for data findings from our interviews and actionable insights from our M&A leaders.

Below, we share the highlights from our theme, Responding to COVID-19: Capital raisings and defensive strategies.

 

Key actions

  • Be proactive and go to lenders early
  • Get an external party to provide advice on equity raising opportunities and options and to navigate the increasingly tricky requirements in the lending market
  • To secure new funding, get an extension of maturities or financial covenant; clients need a combination of disciplined cash flow forecasting and modelling and they must understand the optimal capital structure and credit metrics required by lenders
  • If tapped out on bank debt, look at alternative options such as preferred equity, convertible notes or junior debt.
 
 
Cashflow pressures and bolstering balance sheets

We have seen a spike in capital raisings as companies look to bolster balance sheets in response to pressures on earnings resulting from COVID-19.

Cash flows and balance sheets are being evaluated to understand the implications for liquidity positions and banking covenants and whether equity should be raised.

Some businesses have sufficient cash reserves, due to a reduction in operating costs and access to government programs, but there have been significant impacts at the top end of town.

Go early, go hard

Companies looking to raise new debt are finding it increasingly difficult with lenders dealing with their existing exposures, where they are focussed on their customers’ ability to meet financial obligations.

For borrowers looking for a new lending relationship this means going early and approaching multiple parties to allow time and options. 

However, questions remain as to the amount of liquidity available to support companies, particularly in a longer than expected recovery scenario.

For existing companies, lenders are focused on their ability to meet financial obligations and in some cases may look to trigger material adverse events under facility documents to reduce their loan commitments. 

Defensive strategies

  • A focus on portfolio optimisation and divestments of non-core assets is likely to be a key focus for organisations.
  • Revisiting recent deals to ensure that synergy potential is fully captured will help to maximise post-deal returns.

Be ready for an approach

While share prices have fallen materially, takeover activity to date has been low and any approach in this environment would likely be rejected as being opportunistic.

However, we expect activity to pick up during recovery, with companies whose share prices do not recover in line with the market likely to be reviewed closely.

Companies should always be ready to respond to an approach, but even more so in a dislocated environment. To do this a company should have an up-to-date company model — a clear and robust view of forecasted financial statements is a necessity to provide a view on company valuation and ability to respond quickly to any approach.

Speed of response following an approach is key to ensuring the agenda is not lost to the other party.

 

Read the next blog in our M&A series on Valuation expectations during COVID-19.
Or download our full The deal in focus report for data findings and insights from our interviews with ASX200 M&A leaders. 

 

More about the authors

Aaron Black

Aaron Black

Partner, M&A Advisory

Aaron has 19 years’ experience in investment banking across mergers & acquisitions and equity capital markets working for Macquarie and UBS. Aaron provides advisory services to both private and public companies on mergers, acquisitions, divestments and public & private capital raising transactions. Aaron has worked across a broad range of industries including technology, financial services, mining services, infrastructure services, healthcare, consumer products, business services, retail, media, telecommunications, and manufacturing. As a senior member of Macquarie Capital for 14 years, Aaron has a strong understanding of corporate strategy, business development, M&A and positioning corporates with investors.

Paul Bartlett

Paul Bartlett

Partner, Financial Advisory

Paul is a Partner in Financial Advisory and leads the independent debt advisory practice. The team’s focus is on providing local and global debt financing solutions in regards to debt refinancing, acquisition funding and other forms of capital initiatives to both private and public clients. Paul has more than 30 years of experience in banking, capital markets, advisory and treasury payments, including expertise in global markets, investment banking, corporate finance, private equity, M&A and treasury and risk management practices. Paul has worked with many major local and global banking and advisory firms in the U.S, Asia and Australia, and has built an enviable reputation with Board Directors and Senior Management from a wide range of companies and debt investors. Paul’s extensive strategic expertise and track record provides value for all types of clients in a wide range of industry sectors who are seeking a trusted debt adviser to assist with optimising the structure of their debt financing.

Richard Young

Richard Young

Partner, Financial advisory

Richard is a turnaround and profit improvement specialist and an experienced leader of turnaround and profit improvement diagnostics and execution. He advises and leads large scale improvement programs with a significant focus on delivering identifiable profit and cash flow improvement. He works with clients facing periods of significant disruption or change, including through M&A transactions.