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New Capital Raisings – a Buoyant Period

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It remained a relatively buoyant month in relation to capital raisings. In fact, there were some potentially large licks of additional capital raise announcements, notably the FGX 1 for 1 Bonus Options announcements. The sum total of the maximum amount of capital that could be raised based on announcements over the month is approximately $975m.

Of course, given the largely part of this comprises a 1 for 1 bonus option offer and two unit purchase plans, this maximum amount will not be achieved. Nevertheless, it has been a buoyant several months in respect to capital raisings on the back of some very solid performance and a general contraction in discounts to NTA (where they were present).

These capital raising developments also follow on from the Metrics Income Opportunities Trust (ASX: MOT) raising $53m in a 15% placement and issuing a Unit Purchase Plan that has the potential to raise approximately $100m.

Gryphon Capital Income Trust (ASX: GCI) returned to the market for the second time in a month (after completing a placement to wholesale and sophisticated investors equal to 15% of total issued capital) announcing a Unit Purchase Plan (UPP) on 7 September. Under the terms, existing investors can purchase up to a maximum of $30,000 in additional units at a UPP price of $2.01/unit, the same pricing as the prior 15% placement. This equates to a maximum of circa $140m in additional capital. The manager has actually erred on the conservative side in relation these two raisings (in terms of additional FUM size), and we perceive no ‘digestion’ issues with the timely investment of the additional monies given the liquidity of the RMBS market (i.e., no cash dilution risk with respect to monthly income).

On 7 September, Sandon Capital Investments Limited (ASX: SNC) announced a 1 for 4 non-renounceable entitlement offer at $1.01/share, representing a 15% discount to the pre-tax NTA as at 31 August but in-line with the share price at the same date. Note: taking up the offer will lead to dilution for such investors. The offer has the potential to raise up to $27.9m. Based dividend guidance for FY22 period, the new units are expected to earn a dividend yield of 6.4%, or 8.6% on a grossed up fully franked basis. SNC has had an exceptionally strong last 12-month period, generating total NTA returns of approximately 50% (or 71% on a total share price returns basis), and has outperformed the Australian Small-Mid Cap Peer Index median over this period. The discount to NTA has compressed gradually over this period and in this respect the additional capital raise is well timed.

On 30 August, Flagship Investments Limited (ASX: FSI) announced a redeemable, unsecured convertible note issue of up to $20m. Key terms are: offer price $2.70; interest rate of 5.5% p.a. up to 30 Sep 2024 and increasing to 6.5% thereafter if the Bank Bill Swap rate exceeds 1.2832%; maturity date of 1 Oct 2026 (if not converted or redeemed earlier). Between Feb to April 2021, the discount to NTA compressed to a near all time low of circa -5%, no doubt driven by what had been consistently solid performance relative to the peer group median. Since that time FSI has materially underperformed the peer group over the last six months, which may have led to the discount to NTA expanding again. FSI were no doubt keen to pursue alternative capital raising initiatives, and in our view, would had ‘earned’ the right to do so given its relative performance. That said, there is the potential for a convertible note issue to be NTA accretive for share holders But it can also be dilutive. This risk is two-fold: 1) if the cumulative income paid out to note holders exceeds the incremental returns generated by the capital raised, then the notes are returns dilutive (but we note the converse applies); and, 2) if the conversion price at the time of conversion is less than the NTA/share (and why else would one convert, assuming the persistence of a discount to NTA) then the conversion into ordinary shares may prove dilutionary.

On 3 September, Future Generation Australia Investment Company Limited (ASX: FGX) announced a 1 for 1 Bonus Options issue. The key terms are exercise price $1.48; expiry date 28 April 2023; ASX code FGXOA; and ASX trading commencement 5 October 2021. Given the eligibility for the upcoming dividend of 3 cps if the options are exercised on or before 17 Nov 2021, these options have been priced at-the-money which clearly maximises the potential for a maximum capital raise as well as the potential to raise that capital sooner rather than later by way of investors exercising the option. On the flip side, it also maximises NTA performance dilution risk at the headline level, which is different from at the investor level. The Bonus Options have the potential to raise an additional $582M in capital should 100% be exercised (which never happens). Nevertheless, the Bonus Options do have the potential to elevate FGX into realm of one of the large equities LICs. And what about FGX’s sister strategy, Future Generation Global Investment Company Limited (ASX: FGG)? Simple – its trading at a circa 12% discount to NTA versus the circa 4% discount of FGX. However, should the discount to NTA of FGG materially compress to levels approaching partity to NTA, it is reasonable to expect a similar development with FGG.