The Zip Co Ltd (ASX: ZIP) share price is higher after the buy now, pay later business announced its successful capital raising.
Zip shares benefit from debt reduction
This buy now, pay later business just improved its balance sheet position after paying down debt.
Prior to the financial move by the business, it had A$330 million of outstanding zero coupon senior convertible notes which were due in 2028.
It raised $24.7 million with a shares placement by issuing 52.5 million Zip shares at a fixed price of A$0.47, representing a discount of 6.9% to Zip’s last closing price. These new shares will commence trading on a normal basis on 15 June 2023.
The ASX share said that it received “strong interest” in the placement from both domestic and offshore institutional investors.
Subject to completing the conversion invitation and consent solicitation process, both which remain open, this transaction will do three things for Zip.
The first is that, on a “pre-tax basis”, it is expected to reduce corporate debt by A$192.2 million.
Next, there is an increase in the number of shares on issue by 55.8 million shares.
Third, Zip said that it is expected to be cash neutral for the company and “highly value accretive to Zip shareholders.”
Goldman Sachs acted as the dealer manager and sole underwriter for this transaction.
Management commentary
The Zip co-founder and global chief operating officer, Peter Gray, said:
We are very pleased to announce the successful completion of the equity placement, the first leg of our liability management exercise. The placement will be used to fund the retirement of $39.8 million of our convertible notes at a very significant discount to face value. Along with the consent solicitation process, this exercise will reduce our corporate debt by $192.2 million, further strengthening the balance sheet and positioning the company for our next phase of growth.
Final thoughts on the Zip share price
With such an improvement to the financial position to Zip’s balance sheet, it’s not surprising that the share price has jumped 7% to $0.54, so the shareholders that bought shares have done well already.
I’m not looking to buy Zip for my own portfolio. I hope it does reach breakeven, but the outlook is now much tougher. Arrears might rise due to tougher economic circumstances, consumer spending may slow and Zip faces more regulation.
