On-Market, on target – Early success from On-Market Bookbuilds

Australia has a long history of innovation in the financial services industry. Integrated electronic equities trading, the CHESS settlement system, and the public float of the stock exchange were all at the leading edge of financial ingenuity, with many of these ideas having been replicated as standard practice overseas. The recent launch of the ASX Bookbuild Facility may well be the next success story if market participants can be convinced of its significant benefits.

Launched in October 2013, The ASX BookBuild Facility is a joint endeavour of the Australian Securities Exchange (ASX) and On-Market BookBuilds, and allows listed companies to conduct an equity capital raising with improved transparency, efficiency and fairness, with the end result being beneficial for the issuing company, existing and new investors and also the investment bank or lead manager.

Traditionally, equity capital raisings are managed by an investment bank (who are also usually the underwriter), on behalf of the issuer (the company raising money), with the pricing and allocation of stock being determined behind closed doors. This approach has often raised the concerns of investors and the broader market as to whether this “in house” process delivers accurate pricing and un-conflicted allocations. Additionally, these equity offers are generally offered exclusively to clients of the investment bank, meaning many potential investors are excluded from the opportunity to invest. In many ways the criticism is justified, particularly given investment banks are conflicted between doing the best deal for the issuing company, while also looking after their investment clients.

The ASX Bookbuild Facility endeavours to resolve some of these issues by allowing the same ‘rules of engagement’ seen in the secondary share market, for example live pricing on an ASX trading system, to be utilised in the equity raising process. Issuers, with guidance from the lead managers of the capital raising are able to control pricing and allocation through the establishment of specific deal parameters (including quantum of funds to be raised, minimum and maximum price, and any priority allocations). With these parameters set, the capital raising is then open to the entire market of sophisticated investors, of which there are 200,000 in Australia.

In practice this is achieved by interested investors, via their stockbrokers, bidding for an allocation in the raising using the ASX trading platform. This allows both investors and the issuer to have full visibility of whole-of-market demand and see a live indicative price, in the same way regular equities are traded. This visibility allows the issuer and lead manager to adjust deal parameters as they see fit, and then close the offer once pricing meets their expectation. The issuer can also choose to have settlement of allocations completed simple and efficiently using the existing CHESS Primary Market Facility (CHESS).

In another first for the ASX, the fee structure is based almost entirely on ‘success fees’, in the hope this will attract issuers to use the system. These ‘success fees’ are structured such that an issuer will only pay more than the $25,000 ‘flagfall fee’, if it can up-price or up-size the offering. Given the issuer sets the initial size and price of the offer, they are always in control of where ‘success’ is measured from.

 

So what does this all mean for the various stakeholders?

For existing shareholders, the potential benefit is clear. The improved liquidity and more efficient price discovery the facility provides, means the capital raising is more likely to be priced at a smaller discount to market than otherwise would have been achieved, diminishing the effects of dilution.

For issuers, any reduction in the discount to market effectively lowers their cost of capital, an issue which has been of particular focus given the current state of equity capital markets. Historically, the fees charged by investment banks only contribute 20% of the total cost of equity raising, with the remaining 80% attributable to the discount at which the capital raising is completed compared to the last share price. With the average weighted discount for all Australian share placements over the past 5 years sitting at approximately 8.8%, there is clearly significant scope to narrow this gap and decrease the cost of capital for issuers.

Additionally, and of increasing importance are the added corporate governance benefits the ASX Bookbuild Facility offers. By utilising the facility, on completion of the capital raising directors will genuinely be able to declare to their shareholders that the best and most efficient process has been conducted in the pricing and allocation of new shares.

It is important to note that the ASX Bookbuild process does not remove the issuing company’s right to have a priority book via which it can allocate shares to new strategic investors or existing shareholders, provided these priority parties can match the price.

New investors also enjoy significant benefits, as the facility allows them the ability to access and participate in potentially all new issues, not just those they have access to via their existing broker relationships. The benefits flow further still, as stockbrokers and investment advisors are able to actively offer their clients access to all raisings using the system, as well as charging brokerage on any allocation.

Finally, while investment banks and lead managers will have to concede some of the control they have had over the capital raising process in the past, there are benefits to their business which shouldn’t be overlooked. The ability to provide the best process for their clients should assist in winning mandates, as well as providing transparency to the process and resolving potential conflicts of interest issues.

 

In Practice

While it’s still early days, and just a few companies have dipped their toes in the water with the ASX Bookbuild Facility, the case studies so far have been positive.

WAM Capital Limited (WAM) was the first company to use the system conducting a placement using the system just a few days after the launch. The raising went particularly well, with the company choosing to increase the size of the offer due to demand, from $15m to just under $25m, with the offer priced at a 6.6% discount to market. Following the raising Chairman Geoff Wilson spoke enthusiastically about the technology and commented that he considered the system as a “natural evolution of the market to efficiently raise capital”.

The next to use the system in December 2013, was Liquefied Natural Gas Limited (LNG) who were the first to use On-market Bookbuild for a ‘vanilla’ capital raising. While the company’s goal was to raise $15.5million, market demand was such that they scaled back both the offer quantum and the price, to raise $10.85million at a 13% discount to the last price.

Finally, and most recently, was the Chinese owned U&D Coal Limited (UND), who raised 40% of their $125million IPO via AFS Capital using the ASX Bookbuild Facility. The process was a great success for U&D Coal, with Company Secretary Peter Edwards saying “the process will engage a wider audience and help meet the challenge of securing the minimum 400 Australian investors required under the foreign investment rules”. In addition, AFS Capital’s Director of Investment Banking, Bing Xing Hu was quoted as saying, “The ASX bookbuild helped us reach a much wider audience”.

The introduction of ASX Bookbuild appears to have been highly successful for the companies who bravely chose to be the first to use the facility. While there will always be some resistance to change, it is obvious the facility offers significant benefits to the many stakeholders involved in the capital raising process. Whether ASIC will ever allow regular retail investors to participate in raisings via the platform remains to be seen, but for the many sophisticated investors actively investing in the Australian market, ASX Bookbuild is certainly a step in the right direction towards a system that is truly fair and transparent.