Capital Markets

In Silence, a Golden Opportunity

How to raise money on the QT.
Marie LeoneJanuary 1, 2009

Keenly aware of the worsening economic downturn, Solutia Inc. CFO James Sullivan was intent on paying off the company’s $400 million, 15.5 percent bridge loan — debt the specialty chemical and materials maker had taken on to emerge from bankruptcy last February. But the subprime meltdown continued to strangle access to the capital markets. Sullivan managed to raise the requisite capital, however — on the QT.

In August, Solutia completed two secondary offerings called “registered direct” transactions, selling 33 million shares of common stock to select investors, which generated about $440 million. The deal allowed Solutia “to confidentially approach our shareholders,” without risking a price drop while waiting for the paperwork to clear, says Sullivan.

Amid today’s capital-markets cacophony, registered direct deals can be a silent safe haven for issuers unsure whether an offering will attract investors. The deals — many of them structured as private investment in public equity (PIPE) transactions — generally allow a company to create a shelf registration for a secondary offering with the Securities and Exchange Commission, but then offer shares to only a tiny, select group of investors.

The approach has some intriguing advantages: companies can handpick their investors and get their cash fast. Investors usually commit to the deal upon pricing and then close within three days, says Richard Gormley, a managing director with investment bank Lazard, the placement agent for several recent deals. The stock also tends to command a better price for the issuer than a traditional PIPE deal, since the registered shares are fully liquid when sold.

Some 78 such deals totaling nearly $3 billion closed in 2008. Issuers include tax-service retailer H&R Block, which raised $145 million through a registered direct PIPE offering in October, and luxury travel-and-leisure company Orient-Express Hotels, which used the same structure to raise $55 million in November. “We saw a window of opportunity to raise cash in an accelerated timeframe in a discreet manner,” says Orient-Express CFO Martin O’Grady.

Of course, one of the structure’s downsides is the lack of broad exposure to analysts and investors — but at least it usually keeps short-sellers at bay. “A registered direct is an effective vehicle, because when you have a panicky market you want to have more control over the process of selling securities,” says attorney Stuart Bressman of Proskauer Rose, “and the ability to walk if you don’t get a good deal.”

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