Equity Financing Alternatives NIRI Atlanta Chapter

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Equity Financing AlternativesNIRI Atlanta
Chapter
December 2007
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Equity Financing Needs

• Many reasons
• Fund acquisitions, projects and subsidiaries
• Add working capital for expansion
• Debt reduction (at-the-market debt for equity
  swap)
• Adjust leverage ratios to comply with credit
  facility or regulatory covenants
• Manage a Balance Sheet to retain or enhance
  credit ratings

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Equity Financing Alternatives

• Many alternatives
• Underwritten / traditional Secondary Offerings
• 144A
• QIBs
• Private Investment in Public Equity (PIPE)
• QIBs
• AIs
• Equity Line
• ATM / CEO / SAFE
• S-3 eligible issuers that offer shares for sale
  from their existing Shelf Registrations.
• Dutch Auction
• Direct Equity
• S-3 eligible issuers that offer shares for sale
  from their existing Shelf Registrations via
  modified DSPP

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Equity Financing Alternatives
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• Equity Line
• N/A
• Registered
• High
• Issuer
• Low
• 2 - 4 weeks
• gt 10MM
• None
• High
• N/A
• 1 - 2
• 1-2

Secondary Institutional Registered Very
low Issuer High 3 - 4 Months gt 50MM None High
11 5 16
PIPE HF / PE / LBO / VC Unregistered Medium Dealer
/ Investor Moderate 1 month 1MM 200MM 1
month Low 10 6 16
144a HNW / HF / PE Unregistered Medium Dealer /
Investor Moderate 2 - 3 Months Avg 5MM 1
year Low 5 6 11
Characteristics Investor Type Security
Type Confidentiality Sets Terms / Price Market
Impact Lead Time Sizes Investor Lockup Inv. Legal
Protection Discount Fees ( of Cap) Total
Issuance Cost
Dutch Auction Retail Registered Very low Issuer
/ Investor High 2 - 3 Months 35MM
Open None High 15 4 19
Direct Equity Institutional Registered High Issuer
Low 2 - 6 weeks gt 10MM None High 0 -
2 1 1-3
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• Houlihan Lokey Private Investment in Public
  Equity (PIPE)
• Financial Management Association, The Impact of
  Rule 144a Winter 2002
• IT Investors Journal Why the pox is on SCOX
  August 15, 2004
• Overview Private Investment in Public Equity
  Friedland Capital White Paper July 200
• Target price is daily VWAP not guaranteed
• Tied to VWAP

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Documentation Comparison Grid
1
2
Secondary YES YES YES YES NO NO NO YES YES YES Y
ES
144a YES OPTIONAL YES OPTIONAL YES YES YES NO YE
S NO YES
PIPE YES OPTIONAL YES OPTIONAL YES YES YES YES Y
ES NO YES
Dutch Auction YES OPTIONAL YES OPTIONAL NO NO NO
YES NO YES YES
Equity Line YES YES YES NO NO NO NO NO NO NO OPT
IONAL
Direct Equity Plan NO NO NO NO NO NO NO NO NO OP
TIONAL

• Documentation
• Offering Circular / Prospectus Supp.
• Purchase/Sale Agreement between Issuer
  underwriter
• Due Diligence
• Syndication Group
• QIB Questionnaire
• Legal Opinion
• Reg. Rights Agreement
• Reg. Statement
• Road Shows (Rule 433)
• Credit ratings req.
• Press releases

1. File form 8k of Agreement and supplements to
prospectus
2. Overview Private Investment in Public Equity
(PIPES)
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Equity Lines and Direct Equity

• Can be implemented quickly (typically 2-6 weeks)
  with no road shows
• Clients have access to financing to supplement
  other forms of funding when needed
• Fees and commissions are substantially less than
  all other avenues of equity financing
• High degree of confidentiality
• Negligible market impact
• Companys Management controls the selling of
  shares into the market by setting
• Amount of shares to be sold
• Timing of sales
• Length of selling period
• Minimum sale (floor) prices

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Sample Company
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• Equity Line Direct Equity
• Features Implementation

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Typical Equity Line Features

• Efficient and cost effective solution for issuing
  equity, similar to the operation of a stock
  repurchase plan or Medium Term Note program.
• Transforms the stock issuance process into an
  execution service, by selling shares directly on
  the Exchange (or OTC), exploiting market strength
  and restraining upon market weakness. Sales
  methodology designed to minimize pressure on the
  stock price.
• Issuer determines 1) amount of issuance, 2)
  timing of issuance, 3) floor price and 4)
  duration of selling period. Issuer may stop or
  start issuance at any time intraday.
• No issuance information leakage. Discreet
  selling strategy.
• Allows a public company to issue shares, at its
  discretion, over a period of time (up to 3
  years), rather than having to announce a massive
  sale of shares and be obligated to sell them all
  at once.
• Sale proceeds based on actual sales price (less
  commission) VWAP target.
• Sales are typically executed through electronic
  trading systems (i.e., B-Trade, ITG Posit, SONIC,
  Anonymous SuperDot, Direct, or BNY ConvergEx).
• Share issuance amount limited only to Shelf
  availability.

The issuer targets the dollar amount (or share
amount) to raise. Entering into a Sales Agency
Agreement to sell shares. Shares are sold, with
daily reporting, and can be settled T3 or at the
end of a selling period (1-20 days) utilizing
securities lending. Funds are wired to the
company upon settlement. Regulatory filings are
updated when the issuance is deemed to be
material or at quarter end.
(modeled on BNYCMI SAFE product)
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Example Execution Liquidity
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Equity Line Implementation

• Term Sheet
• Defines Material Terms
• Customizes program to meet client needs

• Due Diligence
• Management meetings
• Business review
• Legal review
• Follows MTN model review throughout life of
  program

• Agreement
• Standardized Agreement
• Comfort Letters
• Settlement Procedures

Timeline 2-4 Weeks

• Execution
• Adjustable selling terms
• Managed selling of shares
• Daily reporting of executions
• Settlement at end of selling periods

• Regulatory Filings
• File Supplements to prospectus (424B5)
• File Form 8-K with Sales Agency Agreement

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Direct Equity Features

• An extremely efficient and cost effective
  solution for issuing equity by leveraging a
  Direct Stock Purchase Plan vehicle, combined with
  sophisticated targeting techniques.
• Allows the issuer to place shares with targeted
  investors.
• Issuer control mitigates volatility, the impact
  of the artificial negative money flow caused by
  arbitrage activity and may result in less
  dilution.
• Allows public companies to offer shares to
  institutional investors at the companies
  discretion over a period of time, rather than
  having to announce a massive sale of shares and
  be obligated to sell them all at once.

The issuer targets the dollar amount to raise.
Mellon Securities LLC, as agent for the Issuer,
notifies qualified investors that the Issuer will
be granting Waivers to the monthly cap detailed
in the Plan document. Investors perform due
diligence, submit a RFW and state a discount from
market price.  The plan details the permissible
discount level 0 - 3.  Once Waivers are
granted, funds are due to the Plan Administrator
on the day prior to the commencement of the
pricing window (generally 10 business days).  A
threshold price is set for the window period and
the Issuer is not obligated to sell stock below
the threshold.  At the end of the window period,
agent calculates the price of the stock, based on
VWAP less the discount granted and shares are
issued to the investor.  
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Program Implementation

• Agreement
• File Plan
• Register Shares via S-3

• Documentation
• Agreement
• Define plan parameters
• Draft / review DSPP

• Preparation
• Print distribute
• Investor identification

Timeline 2-6 Weeks
Prior to Pricing
2 Days before Pricing Bids due 10am EST Bids
Presented Issuer Grants Waivers
1 Day before Pricing Notify bidders Funds wired
by 2pm
3 - 6 Days before Pricing Notify of intent to
activate Analyzes threshold parameters Determine
investor interest
Pricing Period
Pricing Summary 1pm Funds invested or delivered -
4pm DWAC Shares
Agent calculates price Agent calculates share
allocation
Pricing Period (Standard or Dynamic Duration)
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Targeting Methodologies - Peer Overlay
Significant Weightings
Significant Weightings
Selected Peers
Exclude EAS

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Potential Investors (Valuation Model Analysis)
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Investor Targeting Methodologies Valuation Model
Analysis

• Compatibility Score 265 Moderately/High
• Highland Capital Management L.P., Dallas, Texas

1,713 Million in Equity Assets Current holdings
0 Purchase Potential 32.0 Million
Annualized Turnover 15 Owns 1 in Peer Group
Company Compatability Score 150 - 250 moderate
attractiveness 250 - 325 moderately high 325 -
450 high 450 high attractiveness
Source Data Provided by Valuation Technologies
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Threshold Pricing- Market Neutral Design

• Investor selection methodology will help mitigate
  the impact of the artificial negative money flow
  caused by arbitrage activity
• Generally recommend laddered approach -
  combination of
• Established pricing periods
• Demand driven dynamic duration pricing periods

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Investor SummarySample Pricing Period
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Example

• December 2004 filed a Direct Equity Plan with 5
  million shares
• January 2006 initial activation accepted 10
  million from retail and institutional investors
  through Plan.
• Used opportunistically over 3 quarters, raising
  10 - 30 million each time.
• Investment requests in excess of 500 million.
• Client permitted investments totaling in excess
  of 125 million.
• Discount range 1.35 - 1.75.
• During credit crunch in September / October 2007
  activated twice, raising 150 million at discount
  of 2.

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