Cochlear seeks $930m emergency injection as coronavirus bites

Hearing implant maker Cochlear is seeking to raise $930 million from its shareholders as it forecast a significant impact on earnings for more than a year from the coronavirus shutdown of elective surgery.

The stock market darling won a reprieve from its bankers over two expected breaches of its debt covenants before becoming the first top 50 ASX company to raise capital directly as a result of the impact on its business from the coronavirus.

It is also the first time Cochlear has tapped its shareholders since listing on the exchange in 1995, and it is expected that the raising will be completed late on Wednesday.

Cochlear chief executive Dig Howitt has slashed the company's guidance as the coronavirus dents demand.Credit: Edwina Pickles

The once profitable group is now forecasting to report losses before interest, tax, depreciation and amortisation for 2020.

Cochlear chief executive Dig Howitt confirmed the group had received waivers from its lenders for expected breaches of its debt covenants in June 2020 and December 2020. "We've got our covenants, and one of the core parts of those covenants is EBITDA, there’s a pretty good chance that measure on a rolling twelve-months basis will go negative," Mr Howitt said.

"We think we should be okay by June 2021. Our banks have been very supportive through this process," Mr Howitt said, pointing to the fresh $150 million line of credit the group secured from its lenders ahead of launching the capital raising.

Also blowing up Cochlear's balance sheet was its loss last week of a $US268 million ($450 million) US appeals court case over patent infringement, an amount that will have to be paid in cash.

Cochlear withdrew its profit forecasts early last week as it weighed up the impact of the suspension of most elective surgeries in its key markets of the US and Europe to free up hospital space. Along with the shut down of elective surgeries, clinics that help people determine if they need an implant have closed, elderly people are staying at home and there are potential risks to Cochlear's supply chain being hit by shutdowns, Mr Howitt said.

A fund manager at a large investment house who declined to be named because they did not have permission to talk on the record described the raising as "deeply concerning". "We are just trying to get a broad understanding of what’s going on. We think they are being proactive and getting in first," the fund manager said.

Fund manager Andrew Parsons of Resolution Capital who usually specialises in real estate assets but had an interest in Cochlear said he was keeping an eye on Cochlear to try and figure out what is happening to supply chains around the world.

"When a company like Cochlear raises equity in this environment it certainly piques one’s interest if not being outright unsettling," he said.

Cochlear entered a trading halt on Wednesday so it could get the $800 million share sale to fund managers away. It later upsized its institutional placement to $880 million. It will also seek to raise $50 million from its retail shareholders via a share purchase plan.

“While Cochlear commenced the year with a strong balance sheet and conservative gearing levels, the expected impact of COVID-19 on sales, combined with the likely cost of an adverse judgment in a long-running litigation case, is expected to lift gearing to a level that the board is not comfortable with,” Mr Holliday-Smith said.

“To ensure we emerge from this global health pandemic in an even stronger competitive position than before, we are strengthening the balance sheet by raising equity.”

New shares will be offered at $140 each, a 16.7 per cent discount to Cochlear’s last traded price of $168.

The placement will add 5.7 million new shares to its register, equivalent to 9.9 per cent of shares already on issue. The raising has been fully underwritten by JP Morgan. T

Cochlear will suspend its dividend payment until trading conditions improve following the payment of its interim dividend on April 17.