Capital market financing

Transcription

1 SIX Group AG Selnaustrasse 30 P.O. Box 1758 CH-8021 Zurich Contact: Media Relations Capital market financing Basic principles process benefits to the economy

2 Capital market financing In June 2008 the Zurich-based Burkhalter Group, a leading provider of electrical engineering for buildings, was launched on the Swiss stock exchange. The capital raised on SIX Swiss Exchange was used to pay off debt and finance acquisitions. Today the Burkhalter Group offers its services at over 90 sites throughout Switzerland; the company employs around 3,000 people and participates in major projects such as the construction of the Gotthard Base Tunnel. When a company plans to develop such as by expanding, investing in new machinery and technologies or conducting intensive research and development it needs money. If it has insufficient resources of its own, it will have to fall back on external sources of funding: it may conclude an agreement with a private investor, take out a bank loan or seek financing on the public capital market. Stock exchanges are the "market places" of the public capital market. They are places where a company in need of capital can meet a large number of potential investors. In order to ensure a functioning market, legislators and stock exchanges draw up rules on the use of the capital market. Page 3

3 An organization may have a variety of reasons for deciding to seek financing on the capital market. Much larger volumes are raised on the capital market than through private investors or banks. This kind of financing therefore has an important role to play when raising funds for expensive, long-term investments, growth ambitions or internationalization plans. Changing framework conditions affecting the banks such as higher capital requirements resulting from Basel III and the (largely related) squeeze on lending are also prompting companies to consider alternative sources of finance. The current move towards regulation and consolidation in the banking sector contrasts with the advantage gained by having a broad, international investor base on the capital market; this minimizes dependence and ensures greater financial stability and flexibility. Once they have been admitted to the stock exchange, organizations can finance themselves quickly, cheaply and continuously by means of capital increases or by issuing other/different financial instruments. Equity vs. borrowed capital If a company wants to finance itself on the capital market, it can raise equity or borrowed capital. Equity refers to securitized shares (or equities) in the company. Investors use them to provide the company with capital for an unlimited period, while at the same time acquiring participation rights. This means that they have certain voting rights in the company and are able to participate in its business success through its share price performance and dividend payments. When a company raises equity on the stock exchange for the first time, this is known as the "Initial Public Offering" (IPO). Borrowed capital refers to funds that investors make available to a company for a certain period of time only. In exchange they receive regular interest payments. At the end of the specified period, the company must pay the money back to its creditors. The investors' debt securities are typically securitized in the form of bonds, which are listed and traded on the stock market in a similar manner to equities. When bonds are distributed for the first time, this is known by the general term "issue"; as well as companies, issuers may be governments or other organizations outside the private sector. The tradability (fungibility) of the securities it has issued may be another reason for a company to opt for capital market financing. While the initial issue of securities takes place on what is known as the primary market, trading on a stock exchange is known as the secondary market. If a security is frequently traded, this makes it more attractive to investors while also increasing the visibility of the issuer. Both these factors make it easier to raise further capital, thus reducing the capital costs and strengthening the organization's financial responsiveness. Page 4 Page 5

4 The Initial Public Offering (IPO) process Preparation Companies listed on the stock exchange must meet demanding requirements in terms of transparency, corporate governance and creditworthiness, and as a rule they should have accounts stretching back at least two financial years (their "track record"). A company is therefore not ready for the capital market until it has a solid balance sheet as well as established internal structures and processes such as providing investors with full and regular information, as required by law and by the stock exchange itself. One of the first and most important tasks in preparing for listing is choosing the bank(s) that will assist with the IPO. The banks mediate between supply and demand on the public capital market, so their networks and access to the target investors are crucial. Lawyers, IR advisors, auditors and consultancy firms are also partners in the listing process. When conducting due diligence, external experts take a close look at the business, financial and legal situation of the company; its current status is described in the listing prospectus. This forms part of the listing application, which is submitted to the Swiss stock exchange by the lead bank or another representative recognized by SIX Exchange Regulation. Check corporate governance structures Select "going public" partner Launch due diligence process Prepare listing documents an informed assessment of the assets and liabilities, financial position, profits and losses and prospects of the issuer, as well as of the rights attached to the securities." (SIX Swiss Exchange, Listing Rules, art. 27, I) If an issuer has announced its IPO and been approved by the relevant Regulatory Board of SIX Exchange Regulation, it must determine the issue price of its securities in cooperation with the bank. In the case of an IPO, the price is usually calculated during the book building process. The bank is responsible for approaching investors and placing the securities on the market. Primary market /new issues market Issuer Official announcement of IPO Authorization decision by the Regulatory Board The listing prospectus provides investors with a key source of information for making decisions, and also forms the basis for the listing on SIX Swiss Exchange: "In order to be listed, the issuer must publish a listing prospectus which provides sufficient information for competent investors to reach Submit listing documents Institutional investors Page 6 Page 7

5 The Initial Public Offering (IPO) process Book building & allocation of shares First, analysts from the issuing bank present the investment opportunity to potential big investors (banks, insurance companies, pension funds) before the upcoming book building exercise; this gives an initial indication of demand, which taking the market situation and the specific opportunity/risk profile of the investment into account makes it possible to specify a price range. During the actual book building exercise, the investors' takeover offers are then entered in an order book; the prices may move within the specified range. The order book is closed at a specified time and the demand structure is analysed. On the basis of the analysis, the bank and the issuer determine the issue price and allocate the shares. Both these actions are decisively influenced not only by the expected demand on the secondary market, but also by the desired shareholder structure, the quality of the investors (size, time commitment), the volume and timing of the takeover offer etc. On the day of the IPO, public sale and trading of the securities commences on the stock exchange (secondary market); the diagram on the right shows how the shares reach the general public through institutional investors on the launch date. The starting price is the issue price, which may however move up or down within a few minutes of the commencement of trading. Present the investment case to big investors Set and publish price range of shares Collect price offers in the order book of the syndicate banks Set issue price, allocate shares Day of IPO/start of trading The IPO as the "gateway" to the capital market An IPO gives companies access to the capital market, and thus to a stable, long-term financing option: companies listed with SIX can keep on raising further equity or borrowed capital in a straightforward way; e.g. through capital increases, staff participation schemes, bond issues etc. Subsequent listings of this kind are carried out at SIX Swiss Exchange in a highly technical manner and thus attract much less public attention than an IPO; however, they are very frequent occurrences and make the stock exchange an important source of financing. Secondary market/exchange trading Page 8 Page 9

6 Importance of capital market financing to the Swiss economy The public capital market is crucial to a country's economic development: Access to a broad, international investor base and long-term financing enables companies, governments and other institutions to carry out major, capitalintensive projects. Over the long term this has a positive effect on economic growth on the number of jobs, for example, as well as on innovations, training, exports and the tax base. Publicly listed companies make a disproportionately large contribution to national employment, value creation and innovation in Switzerland: they have significantly bigger workforces, more capital-intensive jobs and a greater focus on research than the average Swiss company. Around one sixth of Switzerland's GDP is generated by listed companies, of which there are nearly 300; furthermore, one in three Swiss SMEs are dependent on their custom, and they pay by far the largest share of corporation tax 1. Less dependence on banks gives organizations financed by the capital markets considerably greater financial flexibility and responsiveness: listed companies and bond issuers can raise further capital quickly; liquidity remains within the organization longer, where it can be employed productively. Last but not least, the transparency required by the stock exchange not only has a controlling and regulating effect, but also promotes economic competition. At the same time, the constant stream of comprehensive information provided to the public allows the efficient use of the available financial reserves within an economy: surplus liquidity flows into productive investments; savers have an opportunity to invest their money in a well-diversified and risk-appropriate manner, while participating directly in economic growth. 1 See Christian Hauser, et al.: "Die Bedeutung börsenkotierter Aktiengesellschaften für die Schweizer Volkswirtschaft" [The economic importance of publicly listed companies in Switzerland), Chur (in German only) Page 10