A Painkiller for Equity Issuers

Secondary share sales &doublequot;at the market&doublequot; grew slowly in the second quarter, but more companies put ATMs in place for future capi...
Vincent RyanOctober 13, 2011

With the S&P 500 still 60 points or so off from where it started 2011, CFOs don’t want to do anything to give investors jitters over a dropping share price. A huge one-time share issue can do just that. If a company doesn’t need to raise a large amount of capital in a short period, though, an “at-the-market” (ATM) offering just might suffice.

In the second quarter, U.S. companies raised $2.1 billion through 57 ATM offerings, an 8% increase over the amount of capital raised that way a year earlier, according to Brinson Patrick Securities. The dollar amount of all secondary stock offerings in the United States rose much more — almost 33%, according to the Securities and Financial Markets Assn.

But 25 companies put new ATM facilities in place in the second quarter, and 18 of those 25 had never used an ATM-style offering before. And since June 30, another 17 new ATMs have been registered.

In a traditional underwritten secondary offering, a fixed number of shares is sold at a fixed price in one batch. In an ATM, a listed company sells newly issued shares incrementally through a broker-dealer at market prices. The company’s agent moves in and out of selling mode daily, depending on the stock’s trading price and volume.

Although ATMs require a company to raise equity capital in dribs and drabs, they are a cost-effective way to do it, for two reasons. One, the fees are lower, because the agent sells the shares into the open market; it doesn’t have to distribute the shares to clients or take on risk. “That’s why in some industries ATM offerings are still unknown,” says Todd Wyche, managing partner of Brinson Patrick Securities, developer of an ATM offering platform.

The established investment banks don’t have the incentive to push ATMs because they might cannibalize their higher-margin business,” says Wyche. “Many investment banks have ATMs in their pitchbooks, but they are not going to discuss them unless the issuer asks.”

The second reason ATMs are cost-effective is that they help prevent or minimize the inevitable decline in stock price that occurs around a secondary offering. In large, traditional secondaries, a big block of shares is sold at a discount, causing a drop in share price — sometimes as much as 10% to 15%. The market’s reaction to the issuance can drive up the cost of the equity capital.

As the underwriter shops the deal around to build a book, institutional investors get wind of the sale, Wyche explains. Some sell their shares or short the stock ahead of the deal. For example, if an institution already has a long position in the stock, it might sell its shares and buy at the new, lower price, reducing the cost basis of its holding. Meanwhile, hedge funds without a position in the company might sell short ahead of the deal and then buy the shares back after the deal is priced.

With an ATM, an underwriter is not out soliciting buyers or marketing the deal to gauge interest,” says Wyche. “The company is selling to investors who are just naturally in the market buying shares.

The flexibility and control that ATM issuances provide mean the issuer may be able to sell shares at a price greater than the volume-weighted average price on a given day, says Wyche.

Real estate investment trusts have used ATM offerings the most since Brinson Patrick Securities began to track this kind of financing in the late 1990s. Of the 25 new facilities put in place in the second quarter of this year, 11 were from REITs. Many life-sciences companies also use ATM registrations; seven companies in that industry signed up for new ATM facilities in the second quarter.

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