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Coronavirus: Asian companies seek emergency cash via rights issues to plug holes in balance sheets

Georgina Lee georgina.lee@scmp.com

More listed Asian companies are turning to rights issues to see them through the coronavirus pandemic, as businesses across the region hit limits on rising debt.

In April, two sizeable rights issues announced by Singapore Airlines and Indian conglomerate Reliance Industries paved the way for more deals in Asia this year, bankers said. Companies in the transportation, hospitality and consumption-related sectors will likely announce rights issues later this year as these industries are the hardest hit by the coronavirus pandemic.

"We see a lot of companies in Southeast Asia, India, engaging in measuring the impact of the pandemic on their liquidity positions, and consequently their need for capital" said Mrinal Parekh, head of Southeast Asia & India equity capital markets at BNP Paribas based in Singapore, adding he expects more deals to launch starting in July.

Companies saddled with debt, and whose businesses are greatly impacted by the virus are more likely to undertake rights issues, he said.

A rights issue gives existing shareholders an equal opportunity to buy additional shares. It is often used by companies that are unable to raise new debt due to cash flow constraints at a time when majority shareholders are reluctant to be diluted further through share placements to new investors.

But minority shareholders can also choose to give up their rights to subscribe. Key to success therefore, is wooing majority shareholders' support ahead of launch by offering stock at a steep discount.

Last month, Singapore Airlines successfully won shareholders' support for its mega S$8.8 billion (US$6.2 billion). When the troubled airline first pitched the deal to its shareholders in late March it had already won support from Temasek which holds 55.46 per cent of the airline.

"Majority shareholders' commitment to buy their portion of new rights shares, typically at a discount, signals their confidence towards the company's long term prospects," said Kenneth Ho, managing director of equity capital markets at Haitong International Securities' based in Hong Kong.

Singapore Airlines' deal, comprising new equity and a 10-year mandatory convertible bond that will convert into equity at maturity, was done partly to cover its operating cash flow needs as Covid-19 has caused a slump in passenger revenue. Priced at S$3, the rights shares was priced at a steep 53.8 per cent discount to the last quoted price at S$6.5 on March 25.

Bankers said issuers of rights shares historically would price them at a 20 per cent to 30 per cent discount to the last quoted share price.

Reliance Industries' proposed INR531.25 billion (US$7.04 billion) issue, the oil-to-tech giant's first rights issue in three decades, was intended to cut debt. Billionaire chairman Mukesh Ambani and other controlling shareholders have committed to buying their respective portions of the rights shares at a 14 per cent discount to the previous day's closing price.

In Hong Kong, there were 10 rights issues for the year through mid-April, raising a total of US$583.7 million, more than double the US$247.8 million raised from just six deals a year ago, according to data from Refinitiv.

The biggest deal was issued by Chinese brokerage Guotai Junan International, which raised HK$2.78 billion from an issue completed in March, followed by developer Beijing Capital Land, which raised HK$954.4 million.

Ho said Haitong International saw rights issue proceeds raised by Hong Kong-listed companies increased by about 60 per cent in the first four months this year from a year ago. Listed companies from Chinese property developers to financial services continue to tap investors, even as funds raised from initial public offerings dropped by about a third in the first quarter from a year ago.

To be sure, rights issues are not just for troubled companies. Ho said it is also used by companies in Hong Kong to raise capital for other purposes, such as business expansion.

"Companies also have to weigh up how quickly they need access to new funding. While you can complete share placements to new investors within a week, it often takes more than a month to complete a rights issue," said Ho, citing time needed for publishing a prospectus to all shareholders as an example.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.