Right for the moment
At-the-market stock programmes have become integral part of the ECM lexicon. Originally developed for REITs and other companies with small, frequent funding needs, open market stock sales have been integral in recapitalising financial institutions and others over the past year. But whether it will prove to be a suitable product over the long term is debatable. Stephen Lacey reports.
When Bank of America wrapped up its 1.25bn share at-the-market stock programme in May, few were surprised. Less than a month after regulators informed the bank that it needed to raise US$33.9bn to satisfy terms of the stress test, the US$13.5bn offering came amid the most active month in the history of US equity capital markets – particularly for financial institutions.
The equity sale, the second-largest ever by a US institution, was executed in two parts: an at-the-market sale of 425m shares at US$12.29, a 9% discount to pre-filing levels; and an overnight block of 825m shares at US$10.00, an 11% discount to last sale. Overall, the average price realised was US$10.77 – 20.2% below pre-launch levels. The bank’s existing at-the-market programme gave an indication of a fixed funding target, providing flexibility to switch to a more traditional bookbuild.
The BofA block sale emanated from reverse inquiry, with the handful of large institutions that expressed interest given preferential treatment on allocation and price. At the time, rival ECM bankers questioned whether the bank’s shareholders would not have been better served by a broader marketing effort. "Why not use the additional price discovery?" asked one ECM banker. "At some point in time you have to question whether your shareholders aren't better served by maximising price."
SunTrust Banks replaced its US$1.25bn at-the-market programme with a US$1.4bn accelerated follow-on in early June as part of series of initiatives to fully meet its US$2.2bn funding target. The bank was one of the 19 institutions subjected to the stress test. It had issued US$260m on the programme, before turning to a syndicate of banks led by Morgan Stanley on an overnight offering of 108m shares at US$13.00, a 5.8% discount versus an average execution on the at-the-market of US$14.69.
One of the principal benefits of a traditional bookbuild is the ability to target specific investors. A similar inability is a key criticism of at-the-market stock sales. ”You have to accept that you are not going know who the buyers are,” said a FIG banker. But emotionally a lot of management teams and boards like selling close to market price, as opposed to taking a 10% mark on traditionally marketed offering.”
PNC Financial Services, another of the stress-tested banks, had little trouble executing upon its US$600m at-the-market programme. Through placement agent Morgan Stanley, the bank placed 15m shares at an average price of US$42.21 – a premium to pre-filing levels. One key to execution was size: the programme comprised just one-and-a-half days trading volume and just 3.4% of outstanding.
Lower costs are one benefit of at-the-market stock sales – PNC paid a gross spread of just 1.50% versus a 3%–5% cost for a traditional follow-on offering. Other benefits include increased flexibility on timing and prices of sales and minimised marketing efforts. “They make a lot of sense for highly liquid names,” said an ECM banker. “If you think about financials, their principal asset is their stock, so it is not surprising that they would be big users.”
From an execution perspective, at-the-market programmes work very similarly to open-market stock repurchase programmes, only in reverse. In both, the goal of the placement agent is to limit selling or buying to levels that will not impact prices. As a rule of thumb, activity is limited to no more than 10% of average daily volume.
In some instances, the programmes can simply be too large to execute in a reasonable time frame. Marshall & Illsey, another regional bank, reverted to a US$500m marketed follow-on offering in June. It deemed a possible US$350m at-the-market offering as overly cumbersome, given that it would take up to two months to execute. The need of issuers and their advisors to conduct continuous due diligence while a programme is active is another reason for rapid execution.
The merits of at-the-market stock programmes are debatable. On one hand, they are a useful tool to discretely raise capital, appropriate for companies with highly liquid, volatile stocks. On the other, the discrete format suggests the issuer has nothing to communicate and, consequently can lead to investor confusion. Both suggest there will be a combination of at-the-market and traditionally marketed stock sales in future.