Working capital statements in prospectuses and circulars during the coronavirus pandemic

In light of the COVID-19 pandemic and economic uncertainty, our experience with the Financial Conduct Authority (FCA) has shown us that they are increasingly questioning whether issuers can give a clean working capital statement, as required by the Prospectus Regulation Rules.

The strict requirement to disclose the working capital position for 12 months from the date of the prospectus remains unchanged and a qualified working capital statement in a UK prospectus is a relatively rare event. However, the FCA has recently requested that issuers informally confirm that they have sufficient working capital for 18 months from the date of the prospectus and has now published the following FCA technical supplement.

The FCA technical supplement 

The FCA now appreciates the uncertainty created by COVID-19 and the complexity in the financial modelling underpinning the working capital statement. In summary, under this approach:

• it should now be possible for issuers to disclose in an unqualified working capital statement their key assumptions in relation to business disruption during the coronavirus crisis, underpinning the ‘reasonable worst case scenario’ that must be modelled in support of the working capital statement 
• these assumptions may only be COVID-19 related and should be clear and concise
• there must be a statement that the working capital statement has otherwise been prepared in accordance with The European Securities and Markets Authority (ESMA) prospectus recommendations and the technical supplement to the FCA statement of policy on the COVID-19 crisis.

Many issuers are working on how to illustrate a worst-case scenario for working capital modelling and if an issuer does not have sufficient working capital for 18 months they should seek to discuss further with the FCA the extent of disclosure which may be required.

Additional temporary flexibility

The FCA announced a series of measures aimed at assisting companies to raise new share capital in response to the COVID-19 pandemic and related disruption, while retaining an appropriate degree of investor protection. This includes smaller share issues not requiring a prospectus (i.e. issuances of less than 20% of existing issued share capital). The FCA reiterated conditions, to be applied where companies are seeking this additional temporary flexibility:

• the particular circumstances of the company should be fully explained, including how they are supporting their stakeholders
• proper consultation with a representative sample of the company’s major shareholders should be undertaken
• as far as possible, the issue should be made on a soft pre-emptive basis
• company management should be involved in the allocation process.

This flexible process could prove invaluable for companies seeking short term working capital support and whilst the working capital statement would normally be used to reassure investors a company is solvent for the next 12 months, it would clarify the need for fresh funds was related to the coronavirus pandemic, rather than any fundamental weaknesses in the company’s business model.

How we can help

We have a national team of Corporate Finance advisors who are available to support businesses during this time. If you have any questions or would like further information on how your business may be affected, please contact Mitesh Patelia or your usual Crowe contact.