Speculation that Webjet Limited (ASX: WEB) is struggling to raise enough cash to keep its doors open will worry shareholders.
But things may not be as dire as it sounds. Private equity outfit KKR might be Webjet's white knight after the embattled online travel booking group scrapped plans for its $250 million equity raising, according to the Australian Financial Review.
Surging on the back of a cap raise
If Webjet can find the cash, I reckon the stock will find a floor. The Cochlear Limited (ASX: COH) share price reaction today as it came out of a trading halt is but one example of what I mean.
Shares in the hearing implant maker surged 8.3% in the last hour of trade to $181.90 after it raised $880 million in fresh capital.
The big rebound in the Qantas Airways Limited (ASX: QAN) share price is also telling. The struggling airline which has effectively grounded its entire fleet managed to get a $1 billion loan to keep the lights on.
Meanwhile, the 26.3% surge in the Lovisa Holdings Ltd (ASX: LOV) share price to $4.85 after it got its banker to increase its loan facility and extend the maturity by another three years also bodes well for those who can raise enough cash to tide them through the coronavirus recession.
Don't rely on retail investors for cash
Webjet is reported to have failed to find underwriters for the retail component of its planned cap raise.
The AFR reported that institutional investors were willing to participate to help save the company, but investment banks were reluctant to act as a guarantor for the shareholder purchase plan (SPP).
There just isn't enough confidence that mum and dad investors who are burnt by the COVID-19 bear market will have the appetite to buy more shares in the beaten down stock.
This means potential underwriters will be left with a lot of Webjet shares on their books as they are obliged to buy any share that retail shareholders pass up under the SPP.
Around half of Webjet's shares are held by retail investors, so the risk is considerable.
White knight weilding a double-edged sword
Management is believed to be now looking at option B, which is issuing convertible notes to KKR. If Webjet and the private equity group can strike a deal, Webjet will offer a smaller SPP to its retail base.
To be sure, Webjet doesn't have a debt problem. It doesn't hold much interest-bearing liabilities but it does need the cash for operating expenses. Webjet's income dried up after the public stopped taking holidays due to the virus outbreak.
Overhang from convertible notes
But if Webjet does issue convertible notes, the stock may not get as welcoming a reception when it returns to the bourse. The problem with convertible notes is that it creates an overhang.
KKR will assumedly charge a hefty interest to its funds and will have the option of converting the debt into Webjet shares when the stock recovers. It will then more than likely sell these shares to take s second bite at the cherry.
Depending on how much Webjet gets from KKR, this private equity investor could end up with around 40% of the stock. That's a lot of stock that will be ready for sale in the not too distant future. That will dampen appetite for any other investor looking to buy share in Webjet.
It's also worth noting that fellow travel agent Flight Centre Travel Group Ltd (ASX: FLT) is also rattling the can for survival funds. It will be interesting to see if it can get more traction than Webjet.
