The PIPEs are
smoking again. With the cost of credit rising, companies
struggling to raise cash in either the debt or equity
markets have been increasingly looking for alternative
financing through private investments in public equity, also
known as PIPEs, turbocharging an already booming market.
While the pricing terms for PIPEs may have tightened for
some companies over the summer, most of those seeking
funding are still able to rely on abundant cash from
investors, typically private equity firms and hedge funds.
“When debt is cut off as a financing option, it certainly
opens the door for PIPEs,” said Robert Kyle, executive
vice president of Sagient Research Systems, a provider of
research and data on the PIPE market. “It’s hard to
price debt right now.”
For mortgage-related companies, which have been hit hard by
losses in subprime loans, and for some small-cap companies,
access to bank loans has become more difficult too, and
repercussions from the credit turmoil have spilled over into
the equity market. “The amount of companies looking for
PIPE financing or PIPE-like financing has increased somewhat
as other secondary and follow-on offerings have been stalled
on Wall Street,” said Corey Ribotsky of NIR Group, an
investor in PIPEs.
The most visible, if unacknowledged, PIPE transaction this
year took place less than three weeks ago: Bank of
America’s $2 billion investment in convertible preferreds
of mortgage lender Countrywide Financial on Aug. 22. The
deal, in which Bank of America bought preferred stock that
can be converted into common shares at $18 and in the
meantime yields 7.25% annually, was struck as
Countrywide’s access to capital was being squeezed and
rumors began to fly that it might have to file for
bankruptcy.
To be sure, Bank of
America’s investment isn’t a typical PIPE transaction.
Companies commonly raised an average of $20 million in PIPE
financing in 2006, and the typical PIPE candidate has a
market capitalization under $1 billion, far from
Countrywide’s $12 billion or so. But the transaction
clearly shows that the PIPE market is soaring.
U.S. corporations have raised more than $35 billion using
PIPEs so far this year, already surpassing last year’s
$28.3 billion, according to Sagient Research. Mr. Kyle said
he anticipates the total for the year could reach just under
$50 billion. The average size of transactions has mushroomed
too, doubling to about $40 billion so far this year over
2006.
Mr. Ribotsky of NIR Group said his firm looks at 1,200 to
1,500 companies seeking PIPE financing each year. NIR did
about 50 transactions in 2006 and 68 already this year.
Still, financial executives should be aware that PIPEs
aren’t without risk. Existing shareholders could sell a
company’s securities if they know a PIPE is pending, since
the deals put them at something of a disadvantage to a
PIPE’s owners. CFOs should also remember that PIPE
investors could be looking to sell their stock short. At the
very least, they’ll want to avoid deals that require them
to issue more stock as the price falls. But most new deals
are considered less risky than the ones that gave PIPEs a
bad name in the late 1990s, thanks in part to the Securities
and Exchange Commission’s efforts to curtail short-selling
abuses.
“People are getting more comfortable with the PIPE
structure,” Mr. Kyle said. “The secondary offering
process is more cumbersome.”
But pricing terms have also tightened. “The pricing on
some deals has definitely changed, and underwriting
standards of certain investors have sharpened,” Mr.
Ribotsky said, adding that his firm’s investments have
been fine but that “some deals have been impacted” at
competitors, although he declined to comment further.
Although the PIPE market has become more competitive,
financial executives looking to raise PIPE financing will
still find firms willing to invest.
Hedge funds and private equity shops, typical PIPE
investors, have been raising large sums of money in the past
couple of years, and as opportunities to invest in leveraged
buyouts and high-yield bonds and loans have dried up, they
will have to find other places to invest. PIPEs are an
obvious target.
“There’s a lot of money out there,” said Steven
Siesser, chairman of the specialty finance group at law firm
Lowenstein Sandler. “The money still out there needs to be
put to work. That’s their only choice,” he added,
referring to PIPEs.
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