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01-Apr-2020 11:27:23

Predicting how the market will respond to the current situation is no easy task, but it’s likely a range of options are already being looked at, including high-profile Rights Issues.

Rights Issues

One option for companies to raise money fast is a cash call on their existing shareholders in the form of a Rights Issue. A Rights Issue gives existing shareholders the right to buy new shares at a discounted rate to the current trading share price. If taken up, they can provide a massive cash injection that shores up the balance sheet. Rights Issues can be underwritten by banks who will guarantee the buy up of any unused rights and place them with their institutional shareholders.

Rights Issues are more at risk and susceptible to leaks than most financial transactions. For example, if investors were to learn the company were in financial difficulty they may react by selling their shares, causing the trading price to tumble.

Before proceeding to underwrite the offering, the banks will need to undertake their own due diligence. In this instance, a data room is a must to securely speed up the transaction. Sterling’s data rooms keep all the communication between senior management and their advisors in one place. We also provide the required financial printing services, so when you’re looking to produce the final shareholder prospectus, the deal circle is kept as tight as possible.

The Government’s Response

Amid the Coronavirus pandemic there are some clear business winners and losers. Supermarkets are at maximum capacity and have been announcing record sales for March. Meanwhile, airlines, tourism, leisure, hospitality and retail are left almost completely idle. However long the global lockdown lasts, there are going to be critical gaps to plug in many balance sheets.

The UK Government has received praise for the financial packages being offered to the business sector. For small and medium sized companies, the Government has announced the Coronavirus Business Interruption Loan Scheme (CBILS). This will see backing for 80% of loan value (up to £5 million), which should ensure money keeps flowing.

For larger businesses the Covid-19 Corporate Financing Facility (CCFF) will help them borrow money on favourable lending terms, more in line with what they would have been able to secure pre-crisis.

For companies in the hardest hit sectors, grants and increases to proposed discounts on business rates will target help at the most vulnerable. The deferral of VAT payments will ease the pressure on cash flow and the Coronavirus Job Retention Scheme will mean more people retain their jobs, making an economic bounce back more likely without the prospect of long-lasting gaps in consumer spending.

Despite all these measures, many are already talking about the need for bailouts and part nationalisation. Of course, the government will be highly reluctant to go down this route. It’s easy to focus on the first wave of hardest hit sectors, but in order for the economy to survive we must also look out for the supply chain to these sectors, which can easily be overlooked.

Sterling’s services here to support

Working with a data room provider gives you a holistic view of your information. The decision-making process becomes faster and your data is more secure. For over 30 years Sterling has been in the middle of some of the highest profile transactions, supporting international organisations with Financial Printing and Virtual Data Room services. With 24/7/365 project management, we produce financial prospectuses for shareholders and provide deal teams with the online data room facility for due diligence.

Watch this space

Cash calls can have a worrying effect on investors and have not happened en masse since the aftermath of the 2008 financial crisis. Nonetheless, if managed confidentially they can provide excellent value for shareholders and fast money for cash-strapped companies.

In a recent trend, we have seen Law Firms redeploying Corporate M&A staff into Restructuring. Banks and accountancy firms have also turned their attention to these teams.

Although many are predicting a slowdown in M&A activity, it seems likely there will be an increase in non-core assets sales, large scale restructuring and Rights Issues - all in order, of course, to bolster those under threat balance sheets.


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