Companies: Between Capital Increases and the Option of Sukuk and Bonds
Several major shareholders in certain entities have expressed reservations about recommendations and decisions regarding capital increases, viewing them as a pressing burden on the liquidity of key owners at this specific stage.
It appears that the more acceptable alternative is the issuance of long-term sukuk and bonds, which can achieve the objective efficiently and spare shareholders generally from the burden of capital increase demands. This is particularly relevant given current conditions that may weaken the strength of cash flows from distributions, as well as a relative decline in overall performance, thereby raising the risks that major shareholders will need to borrow to fund these increases at this stage.
Some increases require substantial amounts. With shareholdings exceeding 30% and 40% among specific parties, these increases impose a massive cash burden on them. These parties would prefer to deploy such funds in other opportunities rather than in the current increase. Furthermore, relinquishing such large sums and their exit from the parent company as a major shareholder to a subsidiary or associate would increase pressure on the parent company’s liquidity and its regulatory ratios, while only enhancing the solvency of the subsidiary or associate.
The option of issuing sukuk and bonds appears to be the most successful approach at this stage, especially since they are accessible to all institutions domestically and internationally, thereby enabling the attraction of foreign liquidity to these opportunities.
The market also boasts a broad base of solvent companies that enjoy operational stability, established assets, and good credit ratings. These entities are well-suited to issue covered sukuk and bonds with strong demand, with tenors open to meet specific requirements. The market has many successful precedents in this regard, with bonds being continuously issued for tenors of up to 10 years.
It is worth noting that sukuk and bonds exempt major entities from the burden of equity increases and shield them from the pressures of the operating environment, which might otherwise hinder their ability to service new equity. This implies that large increases at this juncture would become more of a burden than a positive advantage.
The most critical aspect concerns retail investors. According to investment estimates, they may be in a position less capable of contributing to cover their share of the increase obligations, creating a gap that is difficult to bridge. Therefore, the timing of such a move is crucial and plays a decisive role in the success or failure of any capital increase.
