December 2007
Equity Financing Alternatives
NIRI Atlanta Chapter
2
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
3
Equity Financing Alternatives
Many alternatives:
•Underwritten / “traditional” Secondary Offerings
•144A
• QIBs
•Private Investment in Public Equity (PIPE)
• QIBs
• AI’s
•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
4
Equity Financing Alternatives
Characteristics
Equity Line Direct Equity
Secondary
144a
2
PIPE
3
Dutch Auction
Investor Type
N/A
Institutional
Institutional
HNW / HF / PE
HF / PE / LBO / VC
Retail
Security Type
Registered
Registered
Registered
Unregistered
Unregistered
Registered
Confidentiality
High
High
Very low
Medium
Medium
Very low
Sets Terms / Price
Issuer
Issuer
Issuer
Dealer / Investor
Dealer / Investor
Issuer / Investor
Market Impact
Low
Low
High
Moderate
Moderate
High
Lead Time
2 - 4 weeks
2 - 6 weeks
3 - 4 Months
2 - 3 Months
1 month
2 - 3 Months
Sizes
> $10MM
> $10MM
> $50MM
Avg $5MM
$1MM – $200MM
$35MM – Open
Investor Lockup
None
None
None
1 year
1 month+
None
High
High
High
Low
Low
High
N/A
0 - 2%
11%
5%+
10%+
15%
1 - 2%
1%
5%
6%
6%
4%
16%
11%+
16%+
19%
Inv. Legal
Protection
Discount
1
4
Fees (% of Cap)
Total Issuance Cost
1)
2)
3)
4)
5)
6)
5
1-2% 5
1-3%
6
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
Documentation Comparison Grid
1
Documentation
Equity Line
Offering Circular /
Prospectus Supp.
YES
Plan
Purchase/Sale Agreement
between Issuer &
underwriter
YES
Due Diligence
Direct Equity Secondary
PIPE
YES
YES
YES
YES
NO
YES
OPTIONAL
OPTIONAL
OPTIONAL
YES
NO
YES
YES
YES
YES
Syndication Group
NO
NO
YES
OPTIONAL
OPTIONAL
OPTIONAL
QIB Questionnaire
NO
NO
NO
YES
YES
NO
Legal Opinion
NO
NO
NO
YES
YES
NO
Reg. Rights Agreement
NO
NO
NO
YES
YES
NO
Reg. Statement
NO
NO
YES
NO
YES
YES
Road Shows (Rule 433)
NO
NO
YES
YES
YES
NO
Credit ratings req.
NO
NO
YES
NO
NO
YES
Press releases
OPTIONAL
OPTIONAL
YES
YES
YES
YES
1. File form 8k of Agreement and supplements to prospectus
2. Overview: Private Investment in Public Equity (“PIPES”)
6
2
144a
Dutch Auction
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
• Company’s Management controls the selling of shares into the market by
setting:
7
•
Amount of shares to be sold
•
Timing of sales
•
Length of selling period
•
Minimum sale (floor) prices
Sample Company
Key Fundamentals
8
Key Ratios
Price a/o 12/14/2007
$22.15
Price to Book
1.5
Volume on 12/13/2007
2.1 Million
Price to Sales
1.0
10 Day Avg Volume
2.2 Million
Price to Cash Flow
6.5
Shares Outstanding
225 Million
Price to Free Cash Flow
-16.3
13 week Price Range
$19.50-$23.25
Price to Earnings
17.3
Market Capitalization
4.9 Billion
Debt to Equity
1.3
Float
211 million
Return on Equity
8.8
Book Value Per Share
$14.98
Dividend
$0.22
Short Interest Shares
19.1 Million
Yield
4.2%
Institutional Ownership
77.3%
Beta
0.5
Equity Line & Direct Equity
Features & Implementation
9
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 T+3 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.
10
*(modeled on BNYCMI SAFE product)
Example – Execution Liquidity
Sales Agency Financing for Equity ("SAFE")
Sample 20-Day Draw-Down
10/16/2007
10/17/2007
10/18/2007
10/19/2007
10/22/2007
10/23/2007
10/24/2007
10/25/2007
10/26/2007
10/29/2007
10/30/2007
10/31/2007
11/1/2007
11/2/2007
11/5/2007
11/6/2007
11/7/2007
11/8/2007
11/9/2007
11/12/2007
Average Daily
Volume
11
Daily
Volume
2,495,100
1,758,700
1,926,500
3,617,300
2,484,300
2,797,100
3,927,700
6,826,300
3,737,400
3,093,800
2,939,000
2,372,800
4,046,400
4,453,800
3,899,353
3,625,800
3,734,425
3,668,797
3,462,955
2,820,568
67,688,098
Px Last
$21.44
$21.51
$21.35
$21.02
$21.19
$21.10
$21.04
$21.86
$22.10
$22.12
$22.17
$22.55
$21.76
$21.63
$21.65
$22.00
$21.66
$22.20
$22.15
$21.93
VWAP
$21.43
$21.46
$21.40
$21.27
$21.06
$21.12
$20.97
$21.65
$22.05
$22.14
$22.26
$22.39
$22.02
$21.60
$21.55
$21.71
$21.81
$22.06
$22.16
$22.14
$21.72
15%
$Volume
Shares
$8,024,429
374,265
$5,663,603
263,805
$6,186,550
288,975
$11,544,360
542,595
$7,850,400
372,645
$8,866,499
419,565
$12,360,708
589,155
$22,177,830
1,023,945
$12,369,691
560,610
$10,277,758
464,070
$9,815,702
440,850
$7,973,106
355,920
$13,370,418
606,960
$14,438,997
668,070
$12,607,876
584,903
$11,811,388
543,870
$12,224,341
560,164
$12,144,727
550,320
$11,515,018
519,443
$9,371,676
423,085
$220,595,077
10,153,215
3,384,405
20%
$Volume
$10,699,238
$7,551,471
$8,248,734
$15,392,480
$10,467,201
$11,821,999
$16,480,943
$29,570,439
$16,492,922
$13,703,678
$13,087,602
$10,630,808
$17,827,224
$19,251,996
$16,810,501
$15,748,517
$16,299,122
$16,192,969
$15,353,357
$12,495,568
$294,126,770
Shares
499,020
351,740
385,300
723,460
496,860
559,420
785,540
1,365,260
747,480
618,760
587,800
474,560
809,280
890,760
779,871
725,160
746,885
733,759
692,591
564,114
13,537,620
507,661
676,881
Average Price/Share
$21.73
$21.73
% of Outstanding Shares
2.42%
3.22%
SAFE Commission
1%
$2,205,951
$2,941,268
Traditional Secondary
4%
$8,823,803
$11,765,071
Equity Line Implementation
Term Sheet
Due Diligence
Agreement
• Defines Material Terms
• Customizes program to
meet client needs
•
•
•
•
• Standardized Agreement
• Comfort Letters
• Settlement Procedures
Management meetings
Business review
Legal review
Follows MTN model
review throughout life of
program
Timeline: 2-4 Weeks
12
Regulatory Filings
Execution
• File Supplements to
prospectus (424B5)
• File Form 8-K with Sales
Agency Agreement
• Adjustable selling terms
• Managed selling of
shares
• Daily reporting of
executions
• Settlement at end of
selling periods
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.
13
Program Implementation
Documentation
• Agreement
• Define plan parameters
• Draft / review DSPP
Agreement
Preparation
• File Plan
• Register Shares via S-3
• Print & distribute
• Investor identification
Timeline: 2-6 Weeks
Prior to Pricing
3 - 6 Days before Pricing
2 Days before Pricing
1 Day before Pricing
Notify of intent to activate
Bids due 10am EST
Notify bidders
Analyzes threshold parameters
Bids Presented
Funds wired by 2pm
Determine investor interest
Issuer Grants Waivers
Pricing Period
Pricing Period
(Standard or
Dynamic Duration)
Agent calculates price
Agent calculates share allocation
Pricing Summary 1pm
Funds invested or
delivered - 4pm
DWAC Shares
14
Targeting Methodologies - Peer Overlay
High Match, ABC + Peers
Selected Peers
ABC Corp
DEF Corp
GHI Corp
JKL Corp
MNO Corp
PQR Corp
STU Corp
VWX Corp
YZ Corp
15
Significant Weightings
High Match, No ABC, 2 + Peers
State Street Global Advisors (US)
Significant Weightings
VIPT Franklin Income
Securities
Exclude
EAS
T. Rowe Price Associates Inc.
iShares Dow Jones Select Dividends Index Fund
Enhanced Investment Technologies Inc.
Advisory Research Inc.
American Century Investment Mgmt.
Vanguard Equity Income Fund
Vanguard 500 Index Fund
Templeton Investment Counsel LLC
JPMorgan Mid Cap Value Fund
Franklin Income Fund
Duff & Phelps Investment Management Co
MacKay Shields LLC
Vanguard Mid-Cap Index Fund
EARNEST Partners LLC
Utilities Select Sector SPDR Fund
Epoch Investment Partners Inc.
Vanguard Total Stock Market Index Fund
Tradewinds Global Investors LLC
Vanguard Institutional Index Fund
David J. Greene & Company LLC
Franklin Utilities Fund
T. Rowe Price Mid-Cap Value Fund
Franklin Advisers Inc.
Horizon Asset Management Inc.
MFS Investment Management
David Vaughan Investments Inc.
Geode Capital Management L.L.C.
Thompson Siegel & Walmsley LLC
MFC Global Investment Management (US)
Franklin Portfolio Associates L.L.C.
Edge Asset Management Inc.
Moody Aldrich Partners LLC
Principal Investors Equity Income I
Lord Abbett Mid Cap Value Fund
Potential Investors (Valuation Model Analysis)
DEF
GHI
JKL
MNO
PQR
STU
VWX
YZ
ABC
Average
Cap ($ mil.)
2,863
5,240
10,899
3,459
5,148
8,266
12,129
3,718
9,044
6,751.78
Historic Beta
0.47
0.53
0.48
0.44
0.42
0.56
0.55
0.42
0.64
0.50
Dividend Yield
4.08%
3.84%
4.83%
4.74%
4.24%
4.37%
5.20%
3.73%
4.27%
0.04
Price/Earnings
15
20.85
17.47
12.49
15.38
10.08
15.36
17.35
17.88
15.76
1.31
1.42
1.64
1.9
3.05
1.4
1.47
2.25
1.5
1.77
0
0
0
0
0
0
0
0
0
0.00
Peer Tickers
Price/Book
Price/Cash Flow
Price/Sales
0.91
0.59
1.49
1
0.54
0.9
1.23
1.07
0.91
0.96
1 Month Return
4.89
-2.87
3.39
3.72
-1.17
1.32
2.11
6.23
4.51
2.46
3 Month Return
1.2
-3.97
7.12
-4.37
-7.87
0.46
2.76
7.27
5.23
0.87
12 Month Return
7.66
12.04
-0.55
4.98
11.94
16.69
3.24
4.35
4.31
7.18
Growth / Value
Trading A ctivity
Size
Yield
Cash Flow To P rice
Sector M omentum
Residual Reversal
Peer Tickers
DEF
GHI
JKL
MNO
PQR
STU
VWX
YZ
ABC
Average
Cash Plow Back
-0.42
-0.79
-0.77
-0.82
-0.37
-0.16
-0.81
-0.71
-0.54
-0.60
Dividend Discount Model
-0.73
-0.35
-0.6
-0.69
-0.72
-0.55
-0.67
-0.62
-0.69
-0.62
0.2
0.23
0.58
0.13
0.1
0.9
0.65
0.34
0.21
0.37
0.42
0.08
0.08
0.08
0.08
0.08
0.08
0.62
0.39
0.21
0.20
Earnings Momentum
Estimate Change
0.2
0.08
0.36
0.24
0.09
-0.02
0.27
0.28
0.27
Historical Alpha
0.04
-0.06
0.01
0.34
0.12
0.05
0.16
-0.2
-0.47
0.00
Neglect
-1.2
-1
-1.25
-1.37
-1.28
-1.49
-2.12
-0.66
-1.51
-1.32
Historical Earnings To Price
0.53
0.34
0.45
0.41
0.55
0.68
0.47
0.45
0.49
0.49
Estimate Revisions Model
Predicted Earnings To Price
Relative Strength Model
0.44
0.44
0.42
0.42
0.48
0.37
0.37
0.37
0.58
0.43
-0.17
-0.08
-0.33
-0.22
-0.08
0.01
-0.25
-0.23
-0.23
-0.18
Residual Reversal
0.11
0.18
-0.01
0.07
0.18
0.25
0.04
0.06
0.06
0.10
Sector Momentum
-0.16
-0.16
-0.16
-0.16
-0.16
-0.16
-0.16
-0.16
-0.16
-0.16
-
-
-
-
-
-
-
-
-
0.00
Yield
1.61
1.48
2.02
1.97
1.7
1.77
2.22
1.42
1.71
1.77
Size
1.07
1.37
1.61
1.12
1.41
1.59
1.69
1.15
1.59
1.40
Trading Activity
-0.17
-0.12
0.42
-0.07
-0.06
0.38
0.25
-0.18
-0.08
0.04
Growth / Value
0.61
0.45
0.2
-0.02
-0.55
0.48
0.39
-0.24
0.35
0.19
Cash Flow To Price
Valuation Scores: 3 = Highest, -3 = Lowest, 0 = Average
16
Relative Strength
M odel
P redicted Earnings
To P rice
Historical Earnings
To P rice
Neglect
Historical A lpha
Estimate Revisions
M odel
Estimate Change
Earnings M omentum
Dividend Discount
M odel
Cash P low B ack
-2
-1
0
1
2
Investor Targeting Methodologies
Valuation Model Analysis
Compatibility Score: 265 Moderately/High
Highland Capital Management L.P., Dallas, Texas
Company Compatability Score
150 - 250 moderate attractiveness
250 - 325 moderately high
325 - 450 high
450+ high attractiveness
*Source Data Provided by Valuation Technologies
17
Valuation
Model Used
Model Match
Sector Momentum
V ery High
Size
V ery High
Neglect
V ery High
Historical
Earnings To Price
Moderate
$1,713 Million in Equity Assets
Current holdings : $0
Purchase Potential : $32.0 Million
Annualized Turnover : 15%
Owns 1 in Peer Group
Threshold Pricing- Market Neutral Design
Criteria
Av g. Volume
Outflow %
Pricing Period - Day s
Av g. Share Price
Scenarios
2,420,000
Deal Size
Daily Volume
Shares/Proceeds
2,420,000
1 5.8%
Daily Max . Outflow
381 ,1 50
10
Deal Share Outflow
3,81 1 ,500
$22.00
Deal Dollars Inflow
Potential Annual Proceeds:
$
83,853,000
$ 1,006,236,000
• 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
18
Investor Summary
Sample Pricing Period
Large Fund Managers
Bulge Bracket Investment Bank
Regional Brokerage Firm
Large International Commerical Bank
Various Hedge Funds
Retail Investors
% of deal estimated Trading
% of deal estimated Holding
Hold
Sell
Hold
Hold
Sell
Hold
$ 56,000,000
$ 8,000,000
$ 2,400,000
$ 4,000,000
$ 8,000,000
$ 1,600,000
70%
10%
3%
5%
10%
2%
Capital
Raised
20%
80%
Weighted
Discount
Pricing Period:
Date
Day 1
Day 2
Day 3
Day 4
Day 5
Day 6
Day 7
Day 8
Day 9
Day 10
Average Price (10 days):
19
Low
$22.00
$22.01
$22.02
$21.99
$22.04
$22.13
$22.13
$22.18
$22.19
$22.14
$ 80,000,000
High
$22.78
$22.45
$22.90
$23.04
$23.29
$23.38
$23.47
$23.67
$23.32
$22.82
1.65%
1.75%
1.50%
1.80%
1.40%
1.90%
$
80,000,000
1.643%
100%
Average
$22.39
$22.23
$22.46
$22.52
$22.67
$22.76
$22.80
$22.93
$22.76
$22.48
225.9759
Threshold
$22.00
$22.00
$22.00
$22.00
$22.00
$22.00
$22.00
$22.00
$22.00
$22.00
$22.60
2.716%
Example:
Market Cap
Avg Daily Vol
$3 billion
1 million shares
Hybrid thrift/mortgage bank.
Wanted an equity financing tool which would permit them to
enter the market opportunistically.
Also wanted to increase retail base.
• 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%.
20