As many will be aware, NZX has released the outcomes of its review and consultation on the capital raising settings under the NZX Listing Rules (Rules).
Without doubt, the key change coming out of the consultation is to permit the use of accelerated non-renounceable entitlement offers (ANREOs) in New Zealand.
In this update, we breakdown the acronyms and give a bit of background on what an ANREO is, how it has been used to date, and why its adoption could be useful. We also summarise the key amendments to the Rules and applicable disclosure requirements.
The amendments to the Rules are subject to formal approval by the Financial Markets Authority (FMA). If approved, at least one month’s notice will be given to the market, and it is expected that changes will take effect later in the year (but not before 1 October 2023).
Prior to the amended Rules taking effect, NZX will also publish guidance in relation to the new applicable disclosure requirements and to identify the key matters that boards should be considering in relation to capital raising options.
Permitting ANREOs
A key decision of the review was deciding whether to permit ANREOs as an accepted offer structure. But what is an ANREO?
To understand this, it is important to explain how pro rata structures have developed from the traditional rights issue:
- Traditional rights issue: under the traditional rights issue, all shareholders get the same chance to apply for a number of shares pro rata to their existing shareholding. Often this would be at a discount to the trading price, and the right would be renounceable (i.e transferable to a third party). An issuer could also apply to quote the rights so that they could be traded on-market, or the issuer could arrange for a shortfall bookbuild, so that non-participating shareholders could realise some value. The process would normally last about three weeks.
- Accelerated renounceable entitlement offer (AREO): an evolution of the traditional rights issue was the AREO. The innovation was to accelerate the portion of the offer to institutional investors that required less time to organise subscription (usually two days) and then conduct a bookbuild for the shortfall, with settlement occurring shortly afterwards. Any premium achieved in the bookbuild would be given to non-participating shareholders, in effect giving them the benefit of being able to trade the right. The process would then be repeated for the retail component of the offer about two weeks later (which may also permit trading of entitlements). Apart from reducing the time to settlement, a shortened timetable may reduce the period at which an underwriter is “on risk” and therefore increase the ability for the offer to be underwritten and reduce the costs of underwriting. A shorter period for a component of the offer may also reduce the offer discount.
- Accelerated non-renounceable entitlement offer (ANREO): the key difference between an ANREO and AREO is that the offer is not renounceable. The rights are not quoted and traded and there is generally no shortfall bookbuild, with any shortfall being allocated to underwriters and sub-underwriters. If a shortfall bookbuild is included, the proceeds of any premium obtained will go to the issuer instead of existing non-participating shareholders. NZX has stated that these structures are by far the most common form of secondary raising structure in Australia, and are often completed at a tighter discount (low single % discount) and lower dilution ratio than other forms of pro rata offers in New Zealand, indicating they are also being used for growth opportunities. [1] This may also flow from ANREOs generally finding more underwriting and sub-underwriting support as sub-underwriters are almost certain to receive some shortfall shares by comparison to an AREO. Therefore, ANREOs may be useful in volatile markets and if underwriting certainty is necessary.
ANREOs were a popular structure during COVID-19, enabled by NZX through class relief. However, with that relief lapsing, shareholder approval would be required to use the ANREO structure. Therefore, NZX consulted on their use without shareholder approval or a class waiver.
NZX concluded that there is sufficient rationale to permit ANREOs subject to shareholder protections including a threshold test, disclosures and a dilution limit as summarised below. Allowing the use of ANREOs aligns with ASX and other international jurisdictions, and could be useful for our growth (acquisition) opportunities and in recapitalisations.
Summary of ANREO related changes
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Subject |
Summary of proposed changes |
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Threshold test |
The Issuer board will, of course, need to satisfy itself that the use of an ANREO structure is in the company’s best interests as part of normal directors’ duties. But the reasoning why will need to be disclosed, as set out below. |
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ANREO Disclosures |
ANREO disclosures will be mandatory and can be made in the Offer Document, or otherwise as part of the information released through MAP. Threshold test: The Issuer will need to disclose why the ANREO structure was chosen and why the non-renounceable nature is in the Issuer’s best interests. The Issuer will therefore need to provide an explanation of the financial or other benefits relative to other options. Impact on non-participating shareholders: The Issuer will need to disclose the impact of the ANREO structure on non-participating shareholders which will require a discussion of the potential dilution impact with regard to the offer ratio and proposed discount level. External advice: The Issuer will need to disclose whether they have obtained expert investment banking or corporate finance advice in relation to the merits of the ANREO structure and, if so, the name of the relevant adviser(s). NZX notes that it is not mandatory to obtain this advice or to disclose a summary of it, however, it will be an expectation within guidance. |
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Dilution limit |
The ratio of new Equity Securities issued under an ANREO must not be greater than one for three existing Equity Securities held (1:3). |
Other capital raising updates
It is important to note that an ANREO, even when permitted by NZX under the special COVID-19 exemption, was not the most popular capital raising structure. This title went to the “placement and SPP”.
This structure involves using some or all of the 15% annual placement capacity under the Rules usually for an offer to new and existing institutional investors. Retail investors are then given the opportunity to participate through a share purchase plan where they could apply, under the old Rules, for $15,000 per person. In some instances, this would be upsized by using leftover placement capacity. The advantage of this structure is the significant flexibility the Issuer has for the placement component, especially from a timing perspective, which reduces risk. The SPP component also gives retail investors a meaningful chance to buy in.
As part of the other changes made, capital raising settings have been updated to reflect international developments in the context of New Zealand’s capital markets, recent data analysis, and to enhance fairness and consistency across different offer types. This includes enhanced disclosure requirements for placements, as well as increased capacity under share purchase plans to maintain their relevance.
Summary of key placement and SPP changes
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Subject |
Summary of proposed changes |
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Upsize to $50,000 and 10% for SPP |
The monetary limit for SPPs will be increased from $15,000 to $50,000 per registered holder (or, in the case of Equity Securities held through a custodian, each beneficial owner) and the overall SPP issuance threshold will be increased from 5% to 10% of the Class of Equity Securities already on issue at the time. |
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Downside price protection |
The consideration payable for each Equity Security offered under a SPP will not exceed the consideration payable by investors under any other offer of Equity Securities announced together, or made in connection, with the SPP (i.e. for a placement and SPP, the SPP price cannot exceed the placement price). |
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Scaling to occur on record date |
Scaling of acceptances must be according to the number of fully paid Equity Securities carrying Votes held by those accepting the offer on the Record Date (doing so on the closing date is no longer an option). |
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Ratification of past SPPs |
Prior SPPs can be ratified by shareholders so as to refresh the 12 month SPP capacity. |
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Enhanced disclosure for placements |
The disclosure around placements has been beefed up to include:
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NZX’s power to request allocation schedule for placement |
If requested to do so by NZX, the Issuer must within five Business Days provide to NZX (not for public release) a detailed allocation spreadsheet in electronic format showing details of:
It is not NZX’s intention to use this power routinely. |
Summary of other changes
We have also set out below other key changes, relating mostly to pro rata renounceable offers.
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Subject |
Summary of proposed changes |
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Liquidity event |
Issuers will be required to have a liquidity event in the form of quoted rights trading and/or a shortfall bookbuild for Renounceable offer structures to ensure fairness for both retail and institutional investors. |
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Shorter offer and notice periods |
The minimum acceptance period of an offer of Equity Securities in respect of which Rights will be issued will be condensed from seven to five Business Days for online acceptances only. Practically, this allows for a shorter retail investor subscription period. The notice period for announcing a traditional Rights issue will be reduced from five Business Days to four Business Days. |
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Shortfall participation in pro rata offers |
Where the offer of Equity Securities includes one or more bookbuild(s) for the Shortfall, oversubscriptions for any Shortfall must be permitted by holders who are not ineligible overseas holders and who have applied for their full entitlement in the offer or the component of the offer to which the bookbuild relates. Further, the Shortfall allocation policy must be disclosed. |
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Downside price protection for accelerated offers |
The fixed price of an Institutional Entitlement Offer will not be less than that price at which Equity Securities are offered in any related Retail Entitlement Offer. |
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Disclosure of the key details of the underwriting arrangement of an offer will be required in Corporate Action Notices including the fees payable to the Lead Manager and Underwriter, and significant events that could lead to underwriting being terminated. |
Footnote:
[1] Albeit the comparative data is from the COVID-19 capital raising period, where New Zealand capital raisings were largely for recapitalisations.
This article was co-authored by Ronnie Duan, a solicitor in our Corpoate and Commercial team.
