equity financing strategies
TRANSCRIPT
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Revising EquityFinancing
Strategies inDifficult times
Nikhil Atale
July 27, 2009
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Outline
Alternative financing
Applicable regulations
Shareholders right
Implications on accounting system
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Todays landscape Global economies in crisis mode
since 2008
Money generating economies arevirtually to standstill
High imbalance in funds flow
Emerging markets at the mercy ofG8
Financials institutions in Thailand arevery healthy. But
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Declining credit asset prices
pull equity prices downwards
ABX.07-1 AAA versus BKX* index pricesABX.07-1 AAA versus BKX* index prices
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Global IPO
1Q 2007 2Q 2007 3Q 2007 4Q 2007 1Q 2008 2Q 2008 3Q 2008 4Q 2008 1Q 2009
No. Deals 100 169 113 172 27 67 20 6 2
TotalProceeds(billions)
$32.1 $83.1 $47.2 $94.3 $34.8 $35.0 $9.3 $1.6 $0.9
Average DealSize (millions) $321.2 $491.7 $418.1 $548.2 $1,289.3 $522.2 $464.4 $268.5
Global IPOs include all with deal size greater than US$100mm.
- Global IPO value dips 95% at $1.6 bn in 2009
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NAB raises $2.02 billion from upsized follow-on
The fully underwritten deal, which was launched at a fixed
9.7% discount to the latest market price, drew significantdemand and was increased by 50%.
By Anette Jnsson | 11 November 2008
China Metal Recycling prices IPO at the top
The scrap metal recycling company raises $200 million to become the second-largest Hong Kong
IPO year-to-date. Strong retail demand triggers a clawback that boosts the retail tranche to 30%.By Anette Jnsson | 18 June 2009
Xinyi Glass placement upsized to $127 million
The company raises $67 million of fresh capital at a 7.6% discount, while the controllingshareholder takes the opportunity to secure some profit after this year's strong run-up in the
share price.
By Anette Jnsson | 27 May 2009
Cash is king in Thailand
International banks are set to benefit as cash-rich Thai companies look to expand operationsoverseas, but the continued dominance of paper-based transactions proves a challenge.
Italian-Thai convertible upsized to $150 million
The deal, which is only the third CB from Thailand since
2002, is completed without stock borrow or credit
protection, making it something of a rarity.
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Equity Financing Choices
Equity
Warrants Conver-tibles
ADRs Common
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Private Equity
Large source of Capital
The US private equity market exceeded $300b in the US market for 1H 2007 the last time the markets
had ample liquidity.
In the transportation sector, particularly aviation, private equity has been a large participant through thefunding of equity and the purchase of secured/unsecured debt. Since 2001, it has been a significant
player in the restructuring and mergers of several legacy airlines.
Model Strategic Investor Control FinancialInvestor
Rights Offering
With Private Equity
Multiple PrivateEquity Investors
Example Continental II 1 US Airways I Air Canada US Airways II 2
AmountRaised
$140 million $240 million US$854 million $866 million
Pros Benefit to underlyingbusiness
Possible improvedvaluation due toreciprocal benefits toinvestor
Simplified negotiations
Provides endorsement ofboard/management POR
Plan sponsor serves asforcing function in
process
More attractive tobondholders
Price validation by privateinvestor
Less need for deeppocketed investor
Likely higher valuationthan single investor
Cons Possible antitrust orregulatory issues
Possible strategicinvestor conflicts onbusiness plan
Difficult to find deeppocketed investor
Likely to require lowerinitial valuation
Size likely requiresgreater depth of duediligence by prospects
Complicated if majority ofclaims are held by non-public bond holders and/orestimation of substantialportion of claims cant becompleted prior to equityraise
May require cashcomponent option for non-traditional investors (e.g.,
labor, trade creditors, etc.)
Negotiation process canbe complicated
Will still entail a privateequity discount, albeitless than single investor
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Feb-Mar 05
May 05
Merger with AWA used to build new business plan upon which equity was raised
Increased view of capital needs because of Southwest competition at PHLand dramatic spike in oil prices (Hurricane Katrina hit just weeks before closing),
Overcame Katrina, oil price shock and built investor demand
June 05
Sept 05
Publicly pursued standalone plan for $250-350mm Private Equity, while privately
secured preliminary merger agreement and quietly sought equity to fund merger
$375mm Private Equity raised (merger announced 5/17/05)
$565mm Private Equity, potential Rights Offering considered
and discarded
Final Structure
$678mm Private Equity
$188mm Public Equity$144mm Public Convertible Bond
US Airways equity raise was also a unique challenge raising substantial equitycapital to acquire a publicly traded company
Stock Price of LCC 12 Months Pre-and 10 Months Post Emergence 1
$0
$10
$2 0
$3 0
$4 0
$5 0
$6 0
Sep-
0 4
Nov-
0 4
Jan-
0 5
M a r-
0 5
M a y-
0 5
Jul-
0 5
Sep-
0 5
Nov-
0 5
Jan-
0 6
M a r-
0 6
M a y-
0 6
Jul-
0 6
Note:
1. LCC stock pre-emergence represents equivalent AWA stock price.
May 17, 2005 merger announcementSeptember 27, 2005 emergence from Ch. 11 and
acquisition of AWA
US Airways
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Structured Finance
Asset-backed securitization
Corporate financialrestructuring
Structured financingtechniques
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Why Use a Hybrid?
Motivations for Hybrids
Linked to business
risk
Linked to
market risk
Cannot hedge
with derivatives
Driven by investor needs
Company
hedgesCompany does
not hedge
Debt or
equity are
Not good enough
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When Debt and Equity are
Not Enough
Value
of futurecash flows
Value
of futurecash flows
Contractual int. & principal
No upside
Senior claimsControl via restrictions
Contractual int. & principal
No upside
Senior claimsControl via restrictions
Assets Liabilities
Debt
Residual paymentsUpside and downside
Residual claims
Voting control rights
Residual paymentsUpside and downside
Residual claims
Voting control rights
Equity
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When Debt and Equity are
Not Enough
Valueof future
cash flows
Valueof future
cash flows
Contractual int. & principal
No upsideSenior claims
Control via restrictions
Contractual int. & principal
No upsideSenior claims
Control via restrictions
Assets LiabilitiesDebt
Residual payments
Upside and downside
Residual claims
Voting control rights
Residual payments
Upside and downside
Residual claims
Voting control rights
Equity
Alternatives
Collateralized
Asset-securitized
Project financing
Preferred
Warrants
Convertible
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Equity-Linked Bonds
Bonds with warrants
Convertible Bonds
Index-linked Bonds
These are all example of hybrid
bonds and should be priced bydecomposition
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Stock-Purchase Warrants
Warrants are usually detachable and trade on the
securities exchanges
Warrants are often added to a large debt issue assweeteners to enhance the marketability of the issue
Exercise price
Warrants usually have a limited life of about 10 years
or less
Warrants differ from rights and convertibles
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Convertible Bonds
Bond may be converted into stock
The Conversion Ratiois the number of shares ofcommon stock that can be received in exchangefor each convertible security
The Conversion Priceis the per share commonstock price at which the exchange effectivelytakes place
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Financing With Convertibles
Motives for using convertibles include:
It is a deferred sale of common stock that decreases
the dilution of both ownership and earnings They can be used as a sweetener for financing
They can be sold at a lower interest rate than
nonconvertibles
They have far fewer restrictive covenants than
nonconvertibles
It provides a temporarily cheap source of funds
(assuming bonds) for financing projects
Most convertibles have a call feature that enables the
issuer to force conversion when the price of the common
stock rises above the conversion price
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Determining the Value of a
Convertible Bond
There are three values associated with a convertible bond:
Straight Bond Valueis the price at which the bondwould sell in the market without the conversion feature
The Conversion Valueis the product of the current
market price of stock times the conversion ratio of the
bond The Market Valueis the straight or conversion value
plus a market premium based upon future (expected)
stock price movements that will enhance the value of
the conversion feature
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Motivations for Issuing
Hybrid Bonds Company has a view
There are constraints on what thecompany can issue
The company can arbitrage to save
money
Always ask: given my goal, is there
an alternative way of achieving thesame effect (e.g., usingderivatives?)
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(at the holders option)
Benefit of a Bond (guaranteed interest)
Privilege of Exchanging it for Stock
Bonds which can be converted into other corporate
securities are called convertible bonds.
+
Accounting for Hybrid
Bonds
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At Time of Issuance
Convertible bonds recorded as straight debt issue, with any
discount or premium amortized over the term of the debt.
Accounting for Hybrid
Bonds
At Time of Conversion
Companies use the book value method when converting
bonds.
When the debt holder converts the debt to equity, the issuing
company recognizes no gain or loss upon conversion.
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Issuer wishes to encourage prompt conversion.
Issuer offers additional consideration, called a
sweetener.Sweetener is an expense of the period.
Induced Conversion
Recognized same as retiring debt that is not
convertible.
Difference between the acquisition price and
carrying amount should be reported as gain or loss
in the income statement.
Retirement of Convertible Debt
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Convertible preferred stock is considered part of
stockholders equity.
No gain or loss recognized when converted.
Use book value method.
Convertible preferred stock includes an option for the
holder to convert preferred shares into a fixed number
of common shares.
Accounting for CPS
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Simple Structure--Only common stock; no potentially
dilutive securities.
Complex Structure--Potentially dilutive securities arepresent.
Dilutive means the ability to influence the EPS in adownward direction.
EPS in Simple Capital
Structure
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Preferred Stock Dividends
Subtracts the current year preferred stock dividend fromnet income to arrive at income available to common
stockholders.
Preferred dividends are subtracted on cumulative
preferred stock, whether declared or not.
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Complex Capital Structure exists when a business has
convertible securities,
options, warrants, or other rights
that upon conversion or exercise could dilute earnings
per share.
Company reports both basic and diluted earnings pershare.
EPS in Complex Capital
Structure
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Diluted EPS includes the effect of all potential dilutive
common shares that were outstanding during the period.
Companies will not report diluted EPS if the securities in their
capital structure are antidilutive.
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Diluted EPS Convertible Securities
Measure the dilutive effects of potential conversion onEPS using the if-converted method.
This method for a convertible bond assumes:
(1) the conversion at the beginning of the period (or at
the time of issuance of the security, if issued during
the period), and
(2) the elimination of related interest, net of tax.
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EPS Presentation and Disclosure
A company should show per share amounts for:
income from continuing operations,
income before extraordinary items, and
net income.
Per share amounts for a discontinued operation or an
extraordinary item should be presented on the face of the
income statement or in the notes.
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Shareholders rights All issuance needs shareholders
approval
A situation of 1997 crisis andpresent crisis is exception
Banks/creditors virtually take overthe companies and decide the faithin their shareholders interest
Current crisis is classic example:Minority shareholders are burned inAIG, Citi, where US Govt. stepped in
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Shareholders rights Exceptions in case of Govt. bailouts
Cases of issuing not genuine offersfrom unknown based in unknownlocations
Above actions led to high speculation instock price, eventually, majorshareholders found to have exited atpeak
Be watchful incase all of a sudden somecompany issues these instruments!
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Shareholders rights In Theory, shareholders take equal risks
as that of promoters of the company
In normal course, passing resolutionsregarding these issues is purely anumber game
Funds acting in concert tend toblock/raise voices against unfairpractices
Government intervention in specialsituation can be unfair to minorityshareholders
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Understanding Crisis No two crisis are alike
Banks and capital markets are ultimatevictims of crisis
Extensive deleveraging follows after
crisis, thus, companies tend to issueequity to lower their D/E ratios
Its desperate situation and loose looseproposition for all
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Equity Funding in Crisis Study the timing issue carefully
If its for solid business expansion, orexciting acquisition (distress assets),investors would love it
Debt tend to be cheap during crisis, so,if permits, tend to gear your balancesheets
Thai banks are flooded with ampleliquidity, what is lacking is goodcorporate story
If you feel concerned with debt, thenuse hybrids and grab the opportunity
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Equity Funding in Crisis For normal business expansion..here
are my thoughts
Study in-depth, do you really need toexpand with demand is virtually out
Secondly, as commodities are tend to be
cheap, crisis is the best time to buildcapacities at cheap cost
Use debt, internal cash to expand
distress mentality persists during crisis
mode, so dont do a private equity dealfor normal expansion
Unlock your value once, economic cyclesturns upwards (e.g. IPO, etc.)
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THANK YOU!
T