If you listen to these banking titans in the Banking Summit, your takeaway is that due to greater regulation and propensity to ensure stability in the banking system amidst the current higher interest rate regime, banks are now risk adverse making lending very stringent.
Map that against the following:
A burst of small-cap companies chasing fresh equity has nudged Shaw and Partners to add another director to its equity capital markets team.
...and the clear conclusion is that a flood of small/micro cap capital raising (CR) would likely hit the market soon. While that is good business for the investment banking and broking community, that is not good news for retail holders.
...if you do not understand what CR does to your share price, I will give you an example
A valuation of a stock is based on its market cap, i.e Price of stock x Shares in issue.
A common perceived mistake people make is just looking at the share price and not the market cap.
So say Company X trades at $1 on 1 billion shares giving a market cap of $1Billion.
And it then makes a CR at 20% discount at 80c for additional 300 million shares to raise $240mil.
The company now has 1.3 Billion shares.
Depending on what the company uses the funds for, it may or may not be accretive. If it uses it to fund an accretive acquisition, then we could think its market cap could increase, But if it is used to repay a loan or to fund capex over-runs or others that are not accretive, you would not expect a market cap re-rate.
So now, Company X valuation remains at $1B but with 1.3 B shares, its price = 1/1.3 = 76.92c which roughly falls in line with the CR price of 80c.
In other words, the CR dilutes shareholders and has the effect of eroding the company's share price.
But the common mistake people make is looking at the charts months later after the CR, and noticing that it is traded at 60c, and then thinking it is 40c cheaper than its previous $1 price without looking deeper to understand that the share base has expanded by 30%. The charts do not tell you when a CR has been made. Newbies thinking they are buying a bargain are not actually getting the bargain that they thought.
But if things are going the way it is, we can and should expect more heavily discounted CR on the way for many small/midsize companies in exploration and development stage or commercialisation stage. If it is not heavily discounted, the instos would not subcribe.
