…Capital raising drops by 89.7% in 2 yrs
…Analysts give reasons
By Peter Egwuatu
AS the capital market closes the 2019 trading year tomorrow, the two-year negative sentiment on capital raising by quoted companies in the Nigerian Stock Exchange, NSE, has suffered 89.7 percent decline to N34.9 billion 2019 from N340 billion recorded at the end of 2017.
The low purchasing power of the investing public, political uncertainty and other economic headwinds were among the factors that marred capital raising through Rights Issue in the capital market for the fiscal year 2019 and 2018 when compared to 2017, with 2018 recording zero transactions ahead tensions in the preparations for 2019 general elections.
Similarly, the number of companies that raised funds within the same period shrank by 50 percent to seven from 14 in 2017. The seven were recorded after the 2019 elections.
Meanwhile, analysts and stakeholders, have projected that 2020 the Rights Issue market would be better if the recent macroeconomic situation improves further.
When a company is planning the expansion of its operations, it may require a huge amount of capital. However, instead of raising fund through the debt instrument, the company may go for equity instrument through Rights Issue.
To raise capital, Rights Issue is considered as the fastest way to achieve the goal. The process allows the company to raise money without incurring much cost.
A Rights Issue gives preferential treatment to existing shareholders, where they are given the rights (not obligation) to purchase shares at a lower price on or before a specified date.
Existing shareholders of company also enjoy the right to trade with other interested non-shareholders .The Rights Issue are traded in a similar way as normal equity shares on the floor of a stock exchange.
The number of additional shares that can be purchased by the shareholders is usually in proportion to their existing shareholding.
Conversely, existing shareholders can also choose to ignore their Rights.
Financial Vanguard findings on Rights Issue from data obtained from the NSE shows that UACN Property Development Company Plc received an approval in October 10, 2019 to issue 15,961,563,260 units of shares at N1.00 each valued at N15.9 billion; Red Star Express got approval from the Exchange on November 5, 2019 to issue 338,855,291 units of shares at N4.00 each valued at N1.3billion; NPF Micro Finance Bank Plc received approval from the NSE on 26 September 2019 to issue 2,286, 657,766 ordinary shares at N1.50 per share valued at N3.4 billion; WAPIC Insurance Plc got approval from the Exchange on 23 September 2019 to issue 15,613,194,623 ordinary shares at 38 kobo per share valued at N5.9 billion; C & I Leasing got approval from the NSE on September 11, 2019 to issue 539,003,333 ordinary shares at N6.00 per share valued at N3.2 billion.
Others are Fidson Pharmaceuticals Plc which received approval from the NSE on 4th February, 2019 for a Rights Issue of 750,000,000 ordinary shares of 50 kobo each at N4.00 per share on the basis of one new ordinary shares for every two ordinary shares held as at 28 December 2018; Sovereign Trust Insurance Plc Rights Issue of 4,170,411,648 ordinary shares of 50 kobo each at 50 kobo per share on the basis of one new ordinary share for every two ordinary shares held as at 15 January 2019 was approved on 23 January, 2019.
Analysts, stakeholders react
Commenting on the situation, Chief Operating Officer, InvestData, Mr. Ambrose Omoriodon, said: “As we have always said that stock market is a leading indicator that reveals what is happening in an economy. As you may know 2017 was a strong recovery year as foreign portfolio investors came in as a result of relative stability in exchange rate that supported equity prices after recession in 2016 which attracted more companies to raise money through Right Issue for expansion, but there was a drop in 2018 and 2019 due to prolonged bear market for almost two years as a result of geopolitical uncertainties, policy summersaults and others.
The purchasing power of the investing public was weak and economic headwinds did not help matters as there were no liquidity in the market.
“If the economy improves going forward as signal, we expect more primary market activities by way of public offer, Right Issue and others. There is hope for the economy and market.”
In his own comments, the Head of Investment and Research, FSL Securities Limited, Mr Victor Chiazor, said: “Rights Issue are done by companies in need of capital, either to support their working capital, expand the business, shore up their capital base amongst others reasons. The decline observed may be as a result of no urgent need for funding by these companies quoted on the Exchange.
Debt capital might be cheaper for them, or market sentiments towards the equities market have not been bullish enough to guaranty the success of the Rights Issue when compared to the previous period in your study etc. Company management would always weigh the best option to raise capital at any given time, be it through debt or equity (which could be via Rights Issue or private placement etc.). I expect to see more Right Issues next year from the market players especially from the insurance sector, as most of them will need the funding to meet the new minimum capital base set by National Insurance Commission, NAICOM.
Commenting as well, Managing Director, APT Securities & Funds Limited, Mallam Garba Kurfi said: “The listing of MTN and Airtel Africa Plc on our Exchange has generated billions of naira through Book Building. This is one of the reasons for low raising of funds through Rights Issue; also the election period (year) effect also bring uncertainty which most investors look at before coming into the market contributed to the low performance of the primary market particularly Right Issues.
Right Issues is likely going to increase especially with the insurance companies’ recapitalisation deadline in place. Most of them would be coming to the market. For instance, WAPIC, Hallmark Insurance among others have indicated interest. As the increase in GDP growth gives the confidence that more companies are likely to visit the capital market for funds. Also, the CBN Governor had stated that his second term will likely see further recapitalisation of the banks. We are also hoping to see merger among companies with the successful completion of Access Bank and Diamond Bank Plc.
In his reaction, the Chairman, New Dimension Shareholders Association of Nigeria, Mr. Patrick Ajudua said: “Unfavourable economy, poor returns on investment, poor financial performance of most companies and declining income. All the above are responsible for investors apathy to Rights Issues.
Unless we have improve economic climate, improve returns on investment & change in govt policy towards creating conducive biz environment, we will continue to experience declining investors interest in Right Issues.
Another shareholder activist/Chairman of Progressive Shareholders Association of Nigeria, PSAN, Mr. Boniface Okezie said: “A lot of companies want to come to capital market to raise fresh funds to boost their businesses but can’t do so due to certain factors hindering them. The favourable price to come out with, whether Rights or public offering is an issue for companies. So, considering the low prices that companies’ shares are traded on the Exchange, it will not be attractive for such companies to come up with Rights. Also charges by the Securities and Exchange Commission, SEC/NSE, as well as the money that the Issuing Houses also collect makes it unattractive for some of these companies to approach the market.
Another factor affecting the raising of fund from the market is that most companies’ prices are down below their par value prices which discourage investors either to buy or sell. Unfortunately, the regulators are not concerned to look as this issue. The Insurance companies listed on NSE have been asked to recapitalise. Most of their prices listed are below par values; so at what price will they come to the market with, to be able to sell if they are to come up with Rights Issue. We should note that when these companies were listed on the Exchange, their prices were high but now their prices are very low even below par value. So it will be very unattractive for such companies to approach the capital market except their current market prices improve to the extent that investors would be attracted to invest in such companies.”
Stakeholders have called on the Federal Government to expedite actions by churning out favourable economic and monetary policies that would spur increased activity in the capital market and economy in general. They further proffered that government should create enabling environment that will make companies operate at minimal cost since high cost of operations impinges growth and bottom-line of most entities operating in the country.