Andersen in South Africa's Corporate, M&A practice is frequently consulted by clients requesting advice on corporate finance and securing optimal capital structures necessary for sustained growth and resilience. In this post we briefly discuss two strategic tools that have proven invaluable to businesses - rights offerings and debt restructuring.
Capital structure determines the proportion of debt and equity used to finance a company's operations and growth. An optimal capital structure balances the cost of capital with the risk of financial distress, enabling businesses to maximise value and maintain financial flexibility. This strategic balance is imperative for attracting investment, supporting expansion plans and weathering economic fluctuations.
A rights offering presents an opportunity for companies to raise capital without significantly diluting existing shareholders. Debt restructuring, on the other hand, can provide a lifeline for companies facing financial difficulties. By renegotiating the terms of existing debt, businesses can reduce their debt burden, lower interest rates or extend repayment schedules, thereby improving cash flow, profitability and operational stability.
Compared to other equity financing methods, such as issuing new shares to the public or private placements, rights offers allow current shareholders to maintain their ownership percentage, thereby protecting their investment. Additionally, rights offers typically involve lower transaction costs and faster execution times. This makes them an attractive option for companies looking to raise capital efficiently while minimising shareholder dilution and maintaining investor confidence. However, rights offers are not without their risks. If the existing shareholders do not fully subscribe to the new shares, the company may still face funding shortfalls. It is common for companies to rely on the security of an underwriter to pick up any shares not taken up in a rights offer, ensuring that the full basket is always taken up. Additionally, if the market perceives the rights offer as a sign of financial distress, it could lead to a decline in the company's share price, undermining investor confidence.
Careful consideration must be given to factors such as shareholder appetite, market conditions and the company's overall financial health.
Debt restructuring, on the other hand, is an effective tool for companies facing financial challenges or seeking to optimise their capital structure. By renegotiating terms with creditors, businesses can alleviate cash flow pressures, extend repayment periods and potentially reduce interest burdens. However, debt restructuring also comes with its own set of risks. Creditors may demand higher interest rates or additional or enhanced security packages, in exchange for more favourable terms, which could strain the company's resources or potentially place them at a strategic disadvantage. Additionally, the process can damage the company's credit rating, making it more difficult and expensive to secure financing in the future. Debt restructuring can be particularly beneficial in volatile economic climates or when companies are undergoing significant operational or structural changes.
Rights offers and debt restructures offer valuable avenues for businesses to access capital and improve their financial performance. By carefully evaluating these options, companies can make informed decisions that drive long-term growth and success.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.