Capital Markets

When You Can’t Bank On It

Knowing how to do PIPEs, rights offerings, and at-the-market deals could prove a valuable alternative to dealing with stingy banks.
Alix StuartJuly 15, 2009

Looking for liquidity? Time to think outside the bank. CFOs who are trying to raise capital — or may need to in the next two years — “need to think about sources they may not have looked at before, because they may be better than fighting the banks,” says Peter Humphreys, a partner in the structured finance department at law firm McDermott Will & Emery.

Learning how to do various forms of equity offerings may be among the most helpful skills that finance executives at publicly traded companies can learn, if recent deal flow is any indication. Nearly 250 companies issued about $1 billion through secondary offerings in the first half of the year, up 55% over 2008, according to Thomson Reuters.

And since bankers are shying away from traditional deal marketing and underwriting, that equity is increasingly getting placed through some previously unpopular methods, including PIPEs (private investment in public equity), registered direct deals, rights offerings, and at-the-market offerings.

For the most part, such vehicles allow a company to raise money quickly and quietly, often from a select group of investors, without needing to convince a bank to take on the risk of underwriting the amount to be raised. “All these types of deals are happening because the market for underwritten deals may go away,” says Joel Rubinstein, also a McDermott Will & Emery partner. “I don’t see the traditional equity markets coming back in the near future, based on conversations I’m having with investment bankers, so I think you’ll continue to see a lot of use of these other alternatives, particularly as bank debt starts to mature and people need to have the cash [to repay it].”

Registered Direct PIPEs

The PIPEs market in general has been fairly popular over the past several years, offering companies a chance to target a select group of investor for a quick capital raise that doesn’t depend on approval from the Securities and Exchange Commission. Their popularity has cooled somewhat in recent days — 391 PIPE deals raised $21 billion in the first half of 2009, down 55% in number and 67% in value year over year, according to Sagient Research — but a variation on the PIPE structure known as a “registered direct” deal is picking up steam.

Some 19% of deals this year used a registered direct structure, up from 8% last year. In such deals, companies register their offerings with the SEC before selling them directly to investors, making the shares immediately tradable. That means the deal takes slightly longer to complete than a traditional PIPE, where the company registers the shares post-sale. But investors — mostly hedge funds, according to Sagient Research — like that liquidity, given the volatility of the markets. They still, however, often command a discount to the stock’s current trading price, says Rubenstein. They may also want warrants to buy more stock at a given strike price, a deal sweetener included in about half of the deals this year, according to Sagient.

Earlier this month, Raser Technologies, a Utah-based tech company focused on renewable energy, raised a net $23.8 million through a registered direct sale that included warrants. The shares themselves were priced at a 22.5% discount to the stock’s closing price the day before the announcement, while the warrants — good for five years — had a strike price 20% above that closing price.

In this case, the deal is being viewed as a means to get more financing to build a plant that would produce geothermal power, according to a Raser press release. While vendors and other partners had demonstrated an interest in helping to fund plant construction, “in order to be in a position to obtain funding from these sources of capital for our projects, we need to provide a portion of the capital for the power plant development ourselves,” CEO Brent Cook said in the release.

Other companies that have recently completed registered directs include Northern Oil and Gas, cancer drug developer Cel-Sci, and Phoenix Technologies, a $74 million revenue company that develops technology for PCs.

Rights Offerings

Standard practice in Europe and Asia but generally disparaged in the United States, rights offerings involve going back to existing shareholders to ask for more money. In general, a company offers shareholders “rights” to buy shares at a discount to their current trading price over a period of 15 to 30 days.

These shares are registered with the SEC before shareholders exercise their rights, and an underwriter may back-stop the offering, exercising whatever rights are left over, to ensure that the company gets all the cash it seeks. The rights can also be made transferable, which heightens their appeal to investors but adds to the complexity and cost.

Most notably, London-based banking giant HSBC raised $17.7 billion through a rights offering backstopped by Goldman Sachs in March. That deal lends some credibility to the structure, says corporate finance consultant Michael Gumport. “It’s been tarred by a very negative connotation, but with a deal like that, how can you not sit up and take notice?” he says.

Plenty of smaller companies have since taken advantage of the new possibilities that deal may have opened up. Enterprise management software maker Deltek, for example, raised $60 million through a rights offering in late May. USA Technologies, a maker of equipment that lets vending machines take credit cards, is currently in the midst of an offering to sell up to $15 million of its stock in part to help finance customer sales, and biopharma company Pharmacyclics is in the process of trying to raise $24 million through a rights offering.

While the structure can be useful, Gumport warns that it also can be easily manipulated.

“They should theoretically be quite inexpensive and quite efficient and in shareholders’ best interest — but that only holds true if the stock is liquid and rights are transferable and can trade, and the discount is deep enough and subscription rate is high enough,” he says. That’s in part because the bankers’ take depends on how much stock is left over, whereas “at least in straight-up underwriting, you know what the fee is.”

“At-the market” Offerings

For companies with fairly liquid stocks, “at-the-market” or “dribble out” offerings can amount to having something of a blank check in hand. In this type of offering, companies register a certain number of shares to be available for sale over an extended time period, often two or three years. They can then sell them as needed, in small chunks, or at varying prices, or not sell them at all.

“The ATM is a method to more precisely raise capital in that you can better match your need with the timing,” says Dean Colucci, a partner with DLA Piper who has structured 10 such deals in the last 6 months, and 40 in the last 6 years. Companies file all the same paperwork as they would with a standard secondary offering, but an ATM has some benefits, provided the company doesn’t need all the cash immediately. Equity analysts tend to find them favorable, he says, because compared to standard secondary offerings, stocks tend to take less of a hit at the deal announcement, and the transaction costs tend to be lower, in the 1-3% range.

Many financial services companies have put such facilities in place in recent months. Bank of America, for one, issued about $13.5 billion of its own stock over 11 days in May. Also largely in May, among other banks, Fifth Third raised $1 billion and PNC Financial Services raised $600 million through ATMs.

That bodes well for other, non-financial companies. “Now that some of the bigger banks have gotten involved and the number of underwriters in this space have broadened, I see it expanding,” says Colucci.

Life sciences companies have found the structure particularly useful, even though they typically pay higher fees. “A lot of them are trading in $1 to $3 range, but those stocks tend to be volatile, so the companies can take advantage of spikes in the price to sell,” Colucci notes.

In the past month, Achillion Pharmaceuticals and Advanced Life Sciences Holdings both set up ATM offerings for $15 million (known by a variety of other names, including stand-by equity distribution agreements).

Micromet, which develops drugs for cancer and autoimmune diseases, put in place a similar facility in December for $75 million over the next three years, and has taken down about $5 million in the past six months, according to CFO Barclay Phillips. Its deal, a committed equity financing facility, is specifically with Kingsbridge Capital, and contains a built-in discount in that the company’s share price must be above $2 in order for the shares to sell, but the selling price is capped at $2. “It’s not an instrument we will use repeatedly or consistently; we’ll only use it to fund tactical needs that come up,” says Phillips.