If the source of the last year and a half of turmoil was an excess of debt and the solution lies in the recapitalisation of corporate balance sheets – then Australia’s top listed firms have been getting down to business. 

So far this year 78 companies have raised a mammoth $39.8 billion of new equity. But it appears there is still more work to be done – my employer forecasts that listed companies will raise a total of $A60 billion in this calendar year.

This seems an astronomical sum but relative to other downturns it is not huge, representing just 7% of the total market value. At the start of the 1990s, also a period of economic turmoil, equity raisings on this measure were much larger, peaking in 1992 at 11.2% of the total market value. Between 1990 and 1994, the figure did not drop much below 8% and during the Asian crisis in 1997, equity raisings peaked at 8.2% of market value.

For the most part the flurry of activity has been around the repair of balance sheets. Gearing (net debt to equity) across the market has fallen from the start of this year from 53.2% to 42.8%, which represents the lowest level since June 2006.

This, of course, is not a reason for complacency. Debt has been reduced but listed firms’ ability to cover their interest bills remains weak. Interest cover, a company’s earnings before interest and tax divided by net interest expense, across the market stands at around 4.6.

This means that on average Australian companies can cover their interest bill around five times from operating earnings. However, for much of the past three years companies have been able to cover their interest bill well in excess of six times.

The listed property sector – suffering from the retreat of foreign banks, falling property values and just a plain old excess of leverage – has raised the most capital. During the last six months the sector has put its hand out for a total of $A15.2 billion.  This represents nearly a quarter of all the capital raised and nearly a quarter of the entire sector’s market capitalisation.

Some companies, notably General Property Trust, Mirvac, Dexus, and Stockland Group have raised capital twice.

But it is in this sector that perhaps the most work needs to be done. Gearing for the sector stands at about 61%. However, firms such as General Property Trust and Commonwealth Property Office, which are generally regarded to have got their houses in order, have gearing ratios below 30%. The sector’s interest cover ratio remains weak at 2.7 compared with its average before the latest troubles of more than three times.

The industrials sector has placed the least demand on investors, raising just under $A5 billion, led by the likes of Fairfax, One Steel, Pacific Brands, Primary Healthcare and Tabcorp. Interest cover is around four times compared with its average in happier times of five times.  

There has been easy money on the table. As a general rule of thumb the deeper the discount of the capital raising, the better the return.

Bluescope Steel takes the prize for the best return since raising capital. It issued at a near 40% per cert discount to the prevailing share price and those who bought in enjoyed a quick 70% return on their capital – for new money this goes some way to salving the wounds of the past 18 months.

Most of these deeply discounted issues took place at the start of the year, when fear was at its greatest. Firms who then came to the market had little defence, so institutional investors demanded a premium and more to the point got it. Gold miner Lihir takes the wooden spoon for the worst return. Its shares were issued at a 10% discount and have subsequently fallen from the issue some 20%.

Still the size and frequency of capital raisings suggest the Australian market is in rude health. Australia appears willing and able to deal quickly with the weakness in corporate balance sheets.

Clearly there is more to come but if the pattern over the last six months is repeated, Australia’s listed companies will be well set up to take advantage of a recovery in global economic demand. 

Index movements

The key moves in the latest reshuffle of the constituents to the Australian share market indices – the removal of Fairfax Media and the promotion of Oil Search – shows up a couple of important themes in the market. One – the decline of print media –is well established.

The second, however, the growing excitement over liquid natural gas producers is more is more interesting. Oil Search, which is developing an LNG project in Papua New Guinea, is a pure play.

It is a proxy for the theme that a shortage of domestic energy supply in the Asian region will lead to strong demand for a commodity that was once flared from oil wells because it was regarded as worthless.

The composition of the Australian share market indices does not change all that much. The market is dominated by resources stocks (BHP and Rio Tinto) and financials most notably the large Australia banks and the large property companies. Together these sectors represent nearly two-thirds of the entire market.

Richard Inder is an investment adviser at Macquarie Private Wealth. His disclosure statement is free and is available on request. Clients may hold shares in the firms mentioned. Comments, think differently? Write to richard.inder@macquarie.com