In response to my “Seems Smart Now” post about the risk of a company funding all its capital needs with short-term floating rate debt, I got several inquiries about the rate levels for longer-term debt. Please see the following article from Churchill Financial’s blog “On The Left” which presents term debt rates for the 4th quarter 2011 by industry sector (data provided by Thomson Reuters).
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Small cap companies are increasingly using the “at the market” or ATM offering as a means to raise capital in response to a volatile and unpredictable stock market environment.
An “at the market” offering enables a company to take advantage of a receptive stock market to raise capital either by dribbling out its shares over time or by doing a large offering.
How does a corporate “at the market” offering work? First, the requirements:
In order to create a corporate ATM, a public company must be traded on NASDAQ or one of the exchanges, NYSE, AMEX, etc.
These public companies can register shares for future sale by filing an SEC “shelf” offering. This “shelf” permits a company to sell its shares in the future whenever it wishes either by “dribbling out” its shares or by selling them all at once.
The shares sold are fully registered so the buyer can resell them whenever it wishes which expands the universe of potential investors and reduces the liquidity risk.
In a typical corporate ATM, the company picks an investment bank (or banks) to be its agent in selling the shares over time.
The shares are sold “at the market” less a small agent fee.
The company determines the timing and amount of shares to be sold constrained only by what the market will accept.
In theory, the shares are sold to long-term holders but there’s no guarantee.
Let’s compare this with an equity line which is another increasingly common means to raise equity over time.
In an equity line, like a corporate ATM, a company files a registration statement for its planned share sales.
In the equity line, however, the company selects an investor to buy the shares. There is no agent or agent fee.
This investor, however, will structure the relationship with the company to limit the investor’s risk.
This typically means that the investor will price the shares at a healthy discount to market and may add warrants to sweeten its return.
Also, the investor typically limits the amount of shares it will purchase at any one time.
An equity line investor is typically not a long-term holder but rather intends to resell the shares at a profit. Stock market fear of this resale volume has been blamed for depressing an equity line company’s stock price and has slowed the growth of this type of offering.
In contrast, as companies come to learn about the advantages of an “at the market” offering, its use is growing.
If you have any questions about “at the market” or other types of offerings, please contact me.
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With short-term interest rates at historically low levels, many small cap companies are funding all their capital needs with short-term debt.
Can you blame them? Small cap companies are borrowing at 2 to 3% floating rates or a bit more if swapped to fixed rates.
Yes, it is a short maturity, one to three years, but the lenders will extend it when due. They said they would.
Yes, we all know that old maxim, fund long-term assets with long-term capital but companies are saving so much in interest by borrowing short-term.
What’s the risk, anyway? If rates start to rise, companies can refinance with long-term capital then.
I hear this a lot. It worries me.
Interest rates may rise unexpectedly and fast. When the time comes to lock in long-term capital, there’ll likely be a rush to refinance.
First, who lends for 5 to 10 years – insurance companies, specialty lenders, the public bond market?
There are limits to how much and how fast these markets can absorb new debt.
Second, what will happen to interest rates? Spreads on corporate debt have already widened since this summer. What do you think will happen to interest rates when there’s a rush to refinance?
I’ve been encouraging small cap companies to be prudent, to borrow some capital long-term. Create a relationship with the long-term debt market now, before the rush.
In the rush to refinance, you’ll want your company to be the first in line because your company is already a known participant in the long-term debt market.
Now, that’s a smart move.
Please contact me to discuss this or any of my posts. Thank you.
Lippert Heilshorn & Associates Inc., the well-known investor relations firm (LHA), has published the following interesting summary of the impending rule change to 13D reporting and shareholder buying (www.lhai.com).
Schedule 13D Rules
Large fund managers, activist investors and hedge funds are squaring off against some major corporations and their legal counsel over a proposal to significantly modify the Schedule 13D reporting requirements. Currently, institutional investors must report to the SEC when they have reached a 5% or greater equity stake in a public company within 10 days of establishing the position. The proposal sent to the SEC by the prominent law firm Wachtell, Lipton, Rosen & Katz recommends shortening that reporting period to one day, followed by a two-day cooling off before being able to buy more shares.
According to Wachtell, the current system allows “market manipulation and abusive tactics” as investors can buy far more than 5% before the public is aware of its intentions. The firm cites the case of J.C. Penney, where two hedge funds amassed 27% of the company’s shares before filing a 13D. Wachtell adds that investors who sell shares in the days prior to the 13D filing lose out on a potential profit, as share prices typically increase following the disclosure.
As expected, funds and activist investors see this as an attempt to unjustly protect underperforming corporate management and, according to a document they presented to the SEC, will “chill activity which helps give life to shareholder democracy.” They contend that shortening the reporting period increases their cost of building a position; consequently, they would invest in fewer companies and fewer shareholders would receive the premium hedge funds pay. Some of the nation’s largest money managers and pension funds joined together earlier this year in a meeting with the SEC to argue against the Wachtell proposal.
LHA’s position is that the SEC needs to consider what is best for all investors and the market, as well as look at its requirements for “transparency” as applied to issuers against its requirements of investors and other market participants. We believe timely disclosure of accurate information leads to efficient markets. Thus, a shortening of the window between accumulating and reporting a position is positive. On the other hand, a two-day cooling-off period makes no sense if the objective is an efficient market. We also note that according to Factset Mergermetrics, there have been only two cases since 2008 where hedge funds have accumulated positions greater than 15%, one of which is the aforementioned J.C. Penney. As one blogger wrote, the Wachtell proposal “may be a remedy in search of a problem.”
Finally, from our investor relations perspective, if information flow is made more efficient by earlier disclosure via a Schedule 13D, the same logic applies to shortening the Form 13F reporting rules, under which institutional investors currently report their holdings on a quarterly basis some 45 days after the quarter end. Certainly the technology exists to drastically cut that timeframe, which would allow for better communication with current shareholders.
The McKinsey Quarterly has come out with another interesting article, this time about stock buybacks.
In this article, the authors suggest that most company buyback programs don’t work the way they’re intended, to buy back stock when prices are low.
Most companies end up buying back stock at high prices, not at low prices.
It seems that companies, like many investors, are not good at market timing.
I suppose it’s human nature that companies initiate buyback programs when the company is doing well but the stock price seems to lags the fundamentals.
The irony is that companies typically don’t maintain buyback programs when a company’s situation is less favorable and its stock price has dropped.
The bias, therefore, is to buy back stock only at high prices.
The authors calculated that companies’ buyback programs would have been more successful if applied consistently over time, in good times or bad.
The SEC permits these programs, like 10(b)5 programs, to accomplish what the authors suggest.
I noticed in the article’s footnotes, however, that other academic studies have shown that smaller companies have used one-time purchases, like tender offers, to successfully buy back stock at low prices.
I can help you to evaluate which kind of stock buyback program best fits your company and on setting up the program.
Again, my name is Dennis McCarthy. Please contact me to discuss. Thank you.
This is the second in a series of posts about how a company can best respond to our current capital markets environment.
Frequently, our clients express their frustration that the equity market is so volatile now that investors seem reluctant to act. Many investors are unsure whether they’ll get a positive return on their investment.
This has driven many to seek out securities with a yield, maybe interest on debt or a dividend on equity.
Seeing this, we’ve come up with a transaction which responds to investors’ current preferences.
We’ve advised companies to offer their common shareholders a new yield-oriented security in exchange for their common.
We’ve tailored the exchange offers to fit our client’s specific circumstances, there are a number of variations available.
The key is that our clients offer what is in great demand, a yield security, in exchange for what seems less in demand, plain common stock.
We’d be happy to discuss this idea with you to determine whether it works in your situation.
Please call me or email me. Thank you.
Lately, I’ve been struggling with what it will mean to live in a world of slow to no growth.
First, I tried denial. There can’t be a world without growth.
Pick up any company annual report or analyst research report, they always project growth.
It’s in our Wall Street DNA.
We need growth to cover our costs, to justify higher salaries, to reward our shareholders?
But, what if, as is now widely expected, we face a global slowdown for our near-term future?
How do we behave in a slow to no growth world?
We’re going to have to rethink many of our basic assumptions. Here are a couple which come to mind.
First, I think cost control will become more critical without revenue growth to bail us out.
Will this trigger a power shift in companies? Will the path to become CEO now run through accounting?
Second, I think that, without growth, current cash flow is king. There’ll be more skepticism about the promise of future cash flow.
Will this spark a rash of corporate acquisitions as large, cash-flowing companies gobble up companies with no or low cash flow?
On the financing front, with slow to no growth, will companies borrow more to get as much financial leverage as possible.
Or, will equity securities change? Will we see more companies begin to pay dividends or do regular stock buybacks to pay a current return to their equity shareholders.
These are just a few ideas. There are many more potential implications.
Please contact me to discuss the capital markets implications for your company.
My contact information is below. Thank you.
Well, it’s the Fall of 2011, Wall Street has been highly volatile as fears of a new recession and disarray in the Eurozone dominate the news.
As I talk with clients and friends, the discussion always comes around to the question “now what?” What if my company needs capital? Where can I go?
First, there’s debt.
The debt markets are open for business. Based on my experience, finance companies and banks are lending. The public debt market is open too.
A borrower’s projections may get more “stress testing” now but interest rates are historically low.
Second, there’s asset sales
In part because debt is available, buyers are active. If your company needs to raise cash, you might consider selling a business.
I know companies who’ve raised cash in this manner. They’ve gotten good prices for the businesses sold and are now deploying the money.
Third, large cash-rich corporations may be a source of capital for your company.
Sometimes these relationships take the form of direct equity investments into your company but many times they take the form of JVs, licenses, cash advances or even simple grants.
These deals work when the relationship benefits the large company’s business, even if indirectly.
Lastly, don’t forget equity.
You may wish for higher prices when selling equity but you should also be pragmatic. You should ask yourself “how critical is the having cash now? What is the investment opportunity? Does it justify the cost of raising equity now?”
Again, my name is Dennis McCarthy. I’m happy to discuss funding options with you. My contact information is below.