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.

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.


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