Aged care facility operator, Ryman Healthcare’s recent NZ$902 million ($571.69 million) fully underwritten pro-rata accelerated institutional tradeable retail entitlement offer (Paitreo), marked the company’s first capital raise since its IPO in 1999. The transaction closed on February 17, 2023, constituting the third-largest equity raise on the New Zealand stock exchange’s (NZX) secondary market to date. Its success enabled the corporate to repay outstanding debt facilities and reset its capital structure.
The Paitreo fundraising model was first introduced by Merrill Lynch in 2011 on behalf of Australia stock exchange (ASX)-listed Origin Energy, when it sought to raise A$2.3 billion ($1.54 billion) to pursue an acquisition.
With any pro-rata entitlement offer, the amount of shares that investors are eligible to buy is directly proportionate to those they already own. In Ryman’s case, this meant its 1-for-2.81 Paitreo offered entitled shareholders to receive one renounceable right per 2.81 shares owned.
“The board structured the offer with a view to maximising fairness for all shareholders,” a spokesperson for Ryman Healthcare told FinanceAsia.
“The Paitreo structure gave all eligible shareholders the ability to participate in the offer on the same terms (including offer ratio and price), and where they did not participate they received value for their entitlements under either the institutional or retail bookbuilds or by selling retail entitlements on the NZX Main Board,” she added.
A structure that reduces the risk of share dilution, the 180 million or so new shares issued under the Paitreo facility represented 35.6% of total existing shares.
The set-up enabled retail shareholders to decide the timing around sale of their rights, allowing them to achieve earlier access to liquidity and a potentially more attractive pricing outcome compared to any possible shortfall that may have resulted from a traditional bookbuild arrangement, Richard Wilks, head of ECM Syndication for UBS Australasia told FA.
“Paitreos are regarded as the most shareholder-friendly equity raising structure,” he said.
UBS has to executed 11 out of the 13 A$500 million-plus fully underwritten Paitreos executed over the last 5 years.
“With increasing focus on shareholder outcomes, and in particular shareholder fairness in equity raising structures, we expect strong uptake of the Paitreo structure to continue,” Wilks noted.
The deal was notable for being the first of its kind in Australasia to involve a retail oversubscription facility.
“This innovative feature accommodates the ability for retail shareholders to apply for shares in excess of their entitlement, further enhancing the already very retail-friendly Paitreo structure,” he explained.
UBS and Macquarie acted as joint lead managers (JLMs) and underwriters on the deal. Bell Gully, Sidley Austin and Baker McKenzie served as counsel to Ryman, while Russel McVeagh advised the banking group.
The equity raise helped the retirement specialist reset its balance sheet and position itself for growth, the UBS team explained.
Ryman used the proceeds to repay outstanding debt for its 2021 and 2022 US private placement (USPP) notes in full and to lower its pro-forma gearing (calculated as net debt as a percentage of net debt plus equity) from 45.3% as of September 2022 to 33.9%. Following this, the firm set a medium-term gearing target of 30-35%.
“In conjunction with our $902.4 million equity raise, all of our outstanding USPP notes and associated swaps were repaid with a total cost of $855.5 million,” the Ryman spokesperson said.
Strong investor participation
Elaborating on the merits of the transaction, the UBS team noted strong support from both existing and new institutional investors. Eligible institutional shareholders, excluding pre-committed participants, took up approximately 95% of their entitlements under the institutional entitlement offer, the UBS contact explained.
The institutional shortfall bookbuild cleared at NZ$6.00, which represented a NZ$1.00 premium over the offer price of NZ$5.00 and a narrow 0.5% discount to a theoretical ex-rights price (Terp) of NZ$6.03.
The retail entitlement offer also received strong support from retail shareholders, which saw an overall participation rate of close to 66%.
The retail shortfall bookbuild cleared at NZ$5.25, representing a NZ$0.25 premium to the offer price and a narrow discount of 3.5% to Ryman’s last close prior to the transaction.
The institutional offer was launched without any leaks, and confidentiality of the equity raise was preserved throughout the process, the UBS team confirmed, adding that liquid and efficient market conditions meant that the 72.4 million total rights traded at an average of 3.0% per day throughout the full trading period.
Controversy
It is worth noting however, that the Ryman deal received negative media attention at time of execution.
In an investor presentation, Ryman noted $134 million in costs associated with early repayment of its USPP notes. It implied that the company had become concerned with its ability to comply with covenants, noting in particular, the negotiation to amend its interest coverage ratio.
“Included within [the $855.5 million total cost] were cash prepayment costs of $146.9 million, which is above the $134 million estimate provided at the time of the equity raise, predominantly due to unfavourable market movements. The USPP notes were our most expensive debt and it made sense to repay these notes given the expected pressure we were facing on our covenant position,” the Ryman spokesperson told FA.
The document also revealed that the firm had slowed or paused construction at six sites and revised its development pipeline “in response to elevated debt levels and changing market conditions including rising interest rates”.
“Our significant recent investment in our portfolio underpins our potential for future growth but has resulted in higher debt than we are comfortable with in current market conditions,” explained Ryman CEO Richard Umbers in an NZX announcement.
The firm paused dividends for the remainder of the financial year and soon after, market regulator, NZ RegCo, moved to investigate Rymans’ compliance with disclosure obligations.
“Ryman responded to the request and has received no further requests for information,” the company’s spokesperson told FA.
Ryman was founded in 1984 and operates a network of 45 retirement villages across New Zealand and Australia. Among its Australia and New Zealand-based peers that have also made use of the paitreo structure, are ASX-listed Carsales, which tapped the structure in March this year to support its acquisition of a Brazilian car marketplace; ANZ, for its July 2022 purchase of Suncorp Bank from Suncorp Group; and ASX-listed Computershare in 2021, to fund its acquisition of Wells Fargo’s corporate trust services.
Bell Gully, Sidley Austin, Baker McKenzie and Macquarie declined to comment on their involvement in the transaction.
