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Capitalizing The Economy Post COVID-19 …a guidance from the BSE CEO

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KEABETSWE NEWEL

As the world enters an economic recession, as a result of the collapse of businesses and capital markets globally due to the COVID-19 pandemic, Botswana Stock Exchange (BSE) Chief Executive Officer (CEO) Thapelo Tsheole has already penned down a document that advises how the stock market can be utilized post COVID-19 to rebuild the economy. In a document titled ‘How Companies can Utilize the BSE Post COVID-19 Pandemic’, authored by Tsheole, he explains that the BSE as a stock market, plays a very big role in the economic development.

Central to recovery in the post-pandemic era, and perhaps during the pandemic, is the need to maintain solvency and to access capital when it is needed. In addition to available fiscal interventions and relief measures offered by alternative suppliers of capital, businesses need to be made aware of the various methods they could deploy to tap into the deeper pools of contractual savings in the country through the various instruments on the BSE, according to Tsheole.

From a business perspective, Tsheole states that at the core of this unfolding pandemic is the concern around the solvency and liquidity of companies – the lifeblood of every economy. He says most economies have introduced stimulus packages and relief measures of various forms to keep businesses and the economy afloat. At company level, Tsheole writes that access to capital is very critical in any business cycle.

“In this particular one, and even in glory days, it still remains critical to reiterate the importance of utilizing the stock exchange and the methods by which companies can utilize the stock exchange to stay in operation and ramp up as the impact of the pandemic dissipates,” he says.

These methods primarily highlight ways in which a company can raise capital as well as preserve cash on the balance sheet. He mentioned, issuing and Listing Shares on the BSE, which companies can issue and list shares through an initial public offering (IPOs) or private placement to raise capital for business operations and for various other reasons. As a result of the systemic pandemic.

Tsheole stated that it is highly likely that valuations will get depressed during the pandemic whereas the fundamentals of a business could be viewed differently by existing and potential investors. Often, he adds that this presents opportunities to both seekers and suppliers of capital and that the timing could prove beneficial in terms of optimizing the capital structure of the company by accessing public funds through the stock exchange.

“On the BSE, a company can list its shares on various boards depending on its ability to meet the requirements of each of the boards. These are the Main Board, Venture Capital Board, and the Tshipidi SME Board,” he says.

In addition, Tsheole writes that a company may register on the Serala OTC Board as an opportunity for its shares to be traded to facilitate the exit and entry of investors at publicly accessible share prices. In the process of remaining on the Serala OTC Board, a company also benefits from familiarizing itself with the regulatory conduct and compliance requirements of a publicly-listed company and this is useful for companies that strategically intend to eventually issue more shares to raise capital and undertake a listing on either the Main or the Venture Capital board in the short to medium term, according to the BSE boss.

He also spoke about Undertaking Rights Issues, Secondary Offerings, Scrip Dividends and Bonus Shares. To him listing on the BSE affords a company the ability to build a larger and heterogeneous base of retail and institutional investors, domestic and foreign. He says such an investor base is crucial for supporting the company’s corporate actions on an ongoing basis, some of which are aimed at raising more money while others are aimed at preserving cash already on the balance sheet.

“A listed company can raise money through a rights issue which is an option for existing shareholders to buy additional shares in the company at a discounted price compared to the market price. Other than the discounted price, the attractiveness of a rights issue to shareholders is that the shares are purchased in proportion to the existing ownership thus avoiding a dilution in shareholding,” he reveals.

For the company, he states that it is able to raise long-term capital without increasing its debt levels. In addition, Tsheole says a company can conduct a secondary offering of shares, or issuance of additional shares, which could be subscribed to by any investor as a way of raising capital by the company. He says in some cases, companies can structure acquisition transactions financed wholly by issuing shares or through a combination of shares and cash. The fact that the valuation is already determined in the public market is an important catalyst in these transactions.

He also says a company can preserve cash on the balance sheet by paying a dividend using shares instead of paying cash as dividends and this is called a scrip dividend. “To even please its loyal shareholders, it can pay a bonus dividend in the form of additional shares instead of cash.

These corporate actions are crucial for capitalizing the company so it can resuscitate or pursue business expansion, acquisitions and other activities of potential value to shareholders using the preserved cash.

Another strategy revealed by Tsheole is optimizing the Capital Structure and Managing Risk. He explains that debt capital is usually the dominant type of capital in a company’s structure in its early years of operation and with time companies can reach a level where another form of capital is necessary to be injected for the company’s continued growth. Often, he opines that this form of capital is external equity. In some instances, he says lenders cap their debt exposure to companies to mitigate credit risk and this can reduce the possibility of accessing debt financing at reasonable cost.

“Therefore, a company can strategically undertake an IPO to access equity capital, reduce its riskiness and in the process increase its attractiveness and creditworthiness to lenders so it can continue to access external debt. Interestingly, certain lenders do accept shares of a company as collateral for the loans issued as this helps to manage their credit risk exposure,” he states.
Compared to a private company, such an innovative transaction as equity collateralized debt obligations can be hampered by the lack of a publicly determined value of the stock and the lack of a platform for selling the shares held by the lender if the need arises. Given the envisaged and unfolding economic impact of the COVID-19 pandemic, Tsheole said most lenders would increasingly become frugal and borrowers, being corporates, could be compelled to increase their levels of equity capital. He says one of the ways of achieving this is by floating their shares on the BSE to raise funds from the public.

Tsheole also mentions in his document, Issuing and Listing Bonds on the BSE. Generally, he says bonds are deemed less risky in comparison to shares because of the contractual obligations of the borrower to the lender as regards payment of interest and repayment of principal, among other things. From a lender’s perspective and in accordance with the pecking order theory, Tsheole says issuing debt tends to be highly preferred if internal finance is insufficient because of the many advantages of external debt financing relative to those of external equity.

“Again the value proposition is the presence of regulatory oversight but in addition what is most distinct is that a bond, especially a bond of longer maturity, is an attractive asset to pension funds and insurance companies which are managing long-term liabilities that need to be matched with long-term assets such as bonds,” he writes. To him, Bonds can be of various types and structure, which is an important consideration in the context of COVID-19 pandemic and the expected depressed cash flow levels in the early days of economic resuscitation and recovery.

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