By Chinenye Anuforo and Chinwendu Obienyi
Against the backdrop of Nigeria’s economic recession that constricted investors’ disposable income, leading blue chip companies have now settled for right issuance as means of solving their funding.
This was as recent statistics from the Nigerian Stock Exchange (NSE) show that total rights issue launched by nine companies across all sectors rose to N339.23 billion in the first six months of the year. Capital market analysts say there is likely going to be more of such issues in the months ahead as firms seek more stable sources of working capital to pay up dollar-denominated debts owing to risk of a weakened forex market.
Top on the list of companies that went the way of rights issue in the first half of 2017 is Lafarge Africa Plc, the nation’s second largest cement producer, with a rights issue of N140 billion, representing half of its shareholders’ fund. The firm stated that it needed cash to settle a debt of N139 billion owed Holcim. Total long run borrowings within the stability sheet of the cement maker was N105.72 billion within the first quarter of the year whereas complete liabilities stood at N260.37 billion hence the option of rights issue as Initial Public Offering may not guarantee the realisation of the amount.
For its part, Unilever Nigeria Plc came up with a rights issue of N63 billion, which it plans to inject to settle a shareholder/associated debt of $59.70 million. Other sources of funding for the company could be higher due to inflation and reduced investor dispossable income.
For Union Bank of Nigeria Plc, a tier-2 lender, the launch of N50 billion rights points within the second quarter of the year is to speed up its transformation plan.
Already, Guinness Nigeria has finalised plans to raise N40 billion from the capital market to allow the buyer items agency settle the large debt in its stability sheet and bolster working capital place. The firm has acquired a $95 million lifeline from guardian firm, Diageo, to assist cushion the effect of dollar shortage.
Commenting, Peter Ndegwa, Managing Director, Guinness Nigeria Plc, said: “This rights issue will allow the company to deliver on its strategic objectives and give all our shareholders a unique opportunity to increase the number of shares they hold. Our expectation is that funds raised will help mitigate the impact of increasing finance costs, optimise our balance sheet and improve the company’s financial flexibility.”
In the oil and gas sector, Forte Oil Plc deliberated on a rights issue of N20 billion to reap the benefits of the rising alternatives revenue within the downstream oil and fuel trade. Such financial injection will enhance the company’s capability to compete favourably with rival companies including Total Oil, Mobil Oil and Conoil.
In the insurance sector, Wapic Insurance, comes with a N10 billion rights issue seen as a proactive step towards getting the company ready and set for a much-anticipated regulatory increase in the minimum capital of insurance companies. This, according to Wapic Chairman, Aigboje Aig-Imoukhuede, was particularly instructive in view of the recent adoption of the Risk Based Supervision model by the National Insurance Commission (NAICOM), and the directive to insurance companies to implement the Solvency II Capital Allocation Model by 2018.
Meanwhile, proceeds from Livestock Feeds’ N730 million rights issue will be deployed as working capital to enhance its profitability. The company Chairman, Larry Ettah, expressed optimism on the success of the offer, noting that the market was beginning to record some activities in the primary market segment.
On the other hand, C and I Leasing is seeking N100 million additional capital to expand its fleet operations while UAC Nigeria, one of Nigeria’s largest conglomerates, says it’s N15.4 billion rights issue is to bolster working capital and strengthen the stability of its subsidiaries.
Addressing shareholders at the Annual General Meeting (AGM), in Lagos, the UAC Chairman, Mr. Dan Agbor, said the additional capital would help the firm to partake in the various rights issues being undertaken by its subsidiaries in order to provide them with enough capital to take advantage of emerging opportunities in their various sectors.
The capital market as an integral part of the financial market plays a pivotal role essential for government and other institutions in need of long term funds. Government uses the market for infrastructure development and private enterprises use it to fund business growth and development.
But this basic function has increasingly coming under threat since the global financial crisis. In 2007 and 2008, Initial Public Offerings (IPOs) were common before the market witnessed a downturn and companies began shying away from IPOs, and going for rights issues and bonds.
Only Seplat Petroleum Development Company Plc and Transcorp Hotels Plc made IPOs two years ago. While Seplat’s, which was a global IPO, was 100 per cent successful, that of Transcorp Hotels Plc recorded 50 per cent subscription.
The capital market has been incapable of providing the needed funds required to fortify the equity standings of several listed companies in the clutches of debt overhangs. As a result, debt to equity ratios have risen sharply in the last three years as investors pull money out of the financial system, making IPOs doubtful.
An investment analyst and Chief Executive Officer of Cowry Asset Management Limited, Johnson Chukwu, explained that IPOs cannot thrive in an environment where the secondary market is not vibrant. He said, “several reasons entice companies to list on the Exchange.
One, they expect that the market will appropriately buy them and that the market has a premium to the intrinsic worth as to justify investors having to trade their equities.Again, there is liquidity in the equities market so that people can actually buy and trade their shares and lastly, that the listing will give them better access to credit.”
Chukwu argued that the stock market has become unattractive to companies because of the absence of these three factors. “Unfortunately, in a bearish and dampened equities market, these factors are not present. Until there is a significant recovery in the secondary market, one should not expect a re-launch in IPO,” he said.
Recall that in September 2009, Securities and Exchange Commission (SEC) directed the NSE to discontinue the practice of placing securities of listed companies on technical suspension during capital raising exercise as it is not a good practice.
This basically means that any company wishing to embark on a rights issue or public offering understood the risk and was expected to perform due diligence on its valuations or risk being priced out of the market of which the consequences would be a massive under subscription should the market price be much lower than the rights issue price. This is best practice as open market valuation reflects fundamentals, market intelligence, sentiments and everything else that gives a stock its value at any given time.
Analysts are pessimistic on the success of some of the afore-mentioned capital raising exercises due to the difference between the offer price and the price traded on the secondary market, with the secondary market price now mostly lower than offer price.
Market analysts noted that a rights issue price is at discount to the market price, as it gives an investor an opportunity to buy the company’s shares at a cheaper price to what it is trading for on the floor of the stock market, as this will discourage shareholders from picking their stocks.
Speaking on this issue, the Chief Operating Officer of InvestData Limited, Mr. Ambrose Omordion, said that a rights issue price being higher than the market price makes a rights issue highly unattractive and a disincentive for most retail investors to buy, saying rather than take up the rights issue at a higher price, an investor could buy the stock in the open market at a cheaper price.
He pointed out that in the past, companies are placed on a technical suspension and their share prices frozen during a rights issue.