Other Fish

Alternative sources of capital can help when traditional funding disappears.

A study by Thomson Reuters found that the value of equity raised on the 144A market by non-American companies rose to $5.5 billion in 2007, from $2.3 billion in 2003. (See “In the Money” at the end of this article.) The report’s author, Simon Tse, calls the market “a major lifeline between the US capital market and non-US issuers.”

Foreign companies continue to leave listed life in the US, with the cost of complying with Sarbanes-Oxley the primary culprit. (See “So Long, Farewell” at the end of this article.) “If you don’t fancy Sarbanes-Oxley and you believe that 144A gets you most of the way there, that’s where you’ll pitch your tent,” says Jonathan Roe, London-based co-head of equity capital markets at Dresdner Kleinwort. Furthermore, new trading platforms allow QIBs to trade securities more freely.

But the 144A market does have its drawbacks. Despite relatively low legal requirements, buyers still want a certain amount of disclosure, and that means advisory costs can be higher than when accessing European markets, says Bart Capeci, a capital markets partner in the London office of law firm Allen & Overy. But in the current climate, companies could be willing to pay a premium to connect with a new investor base.

“It’s more difficult and more expensive to access the 144A market than the euro markets,” Capeci explains. “So a lot of CFOs, all things being equal, would rather not. But in recent years all things haven’t been quite so equal as they have in the past.” An illustration of his point was the US debt market staying open last year a lot longer than European markets. “And if you want to raise a huge amount of money, the pricing tension that you will get from selling into the US with 144A can make a significant difference,” Capeci says.

Equity Facilities: In the Tranches

Companies that are happy to place equity but less keen on the rigmarole and roadshows entailed might consider an equity facility with a single finance house. Instead of a company raising a set amount of capital through an equity offering, the financier agrees to provide the sum in tranches, taking shares in the company at the current market price whenever the company decides it needs fresh capital. For growth companies with a rising share price, that can be less dilutive than a single transaction.

The process was started in 2001 by Yorkville Advisors, which calls it a standby equity distribution agreement, or SEDA. Paul Strzelecki, who runs Yorkville’s London office, refers to it as “management controlled mezzanine” — the company gets new funding when required, and if the board decides it needs the whole sum at once, the SEDA can be turned into a convertible debt facility. It benefits a company which knows it won’t need all the money at once, Strzelecki adds, as it’s not “collecting money, sticking it in the bank and earning less interest than the real value of its stock.”


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