equity financing strategies

8/9/2019 Equity Financing Strategies

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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


No upside

Senior claimsControl via restrictions

Assets Liabilities

Debt

Residual paymentsUpside and downside

Residual claims

Voting control rights

Residual paymentsUpside and downside

Residual claims


Equity


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When Debt and Equity are

Not Enough

Valueof future

cash flows

Valueof future

cash flows


No upsideSenior claims

Control via restrictions


No upsideSenior claims

Control via restrictions

Assets LiabilitiesDebt

Residual payments

Upside and downside

Residual claims


Residual payments

Upside and downside

Residual claims


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

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