The lender of last resort
by: Stacy Mosher

October 12, 2001


•Tough times

•Fewer deals, tougher terms

•A time of trepidation

•Where cash is king

•The lender of last resort



•Large / middle-market lending standards tightened

•Traditonal middle market M&A lead arranger volume

•Recent middle market private equity fund closings

•Middle market Ebitda multiples

•Full PIPEline


The growing tally of bankrupt dot-coms over the past 18 months masks another trend among many middle-market technology companies still on their feet. These companies, which mostly went public amid the '90s tech boom, have survived by turning to so-called PIPE (private investments in public equities) financings — an expensive and potentially explosive form of funding that has nonetheless proved a life-saver for many small-to-medium-sized tech companies.

Some PIPEs have earned a more troubling sobriquet, toxic financings, because the structure of some kinds of equity lines of finance and convertible debentures have been associated in the markets with the collapse of companies' stock prices amid short selling. But the upside — money to ensure a company's survival — and the fact that not all PIPEs are toxic, has led to their growing popularity over the past 18 months.

"My PIPE absolutely saved my company," said Joseph Boyle, chairman, president and CEO of Affinity Technology Group Inc., a Columbia, S.C.-based developer of electronic and online technologies for consumer financial services. Affinity signed on for a convertible debenture from New York-based hedge fund Rhino Advisors' offshore investment fund, Amro International S.A., in mid-2000, after Affinity's stock had taken a nosedive in the Nasdaq slump.

Boyle, who was formerly a CPA with PricewaterhouseCoopers, carried out a great deal of research before entering into the Amro PIPE, and was able to negotiate a financing that has helped the company weather its financial difficulties. "I just restructured that debenture in terms very favorable to the company, and have been very content," he said. "I've worked with Rhino very closely, and have been able to term out and eliminate the conversion features."

Boyle has plenty of company. Total PIPE financings in the U.S. in 2001 to date equaled $9.1 billion, according to (see tables). This is less than last year's record $24 billion in total PIPE financings, which include private placements, convertible debentures and structured equity lines, but close to the previous annual record of $10 billion set in 1999 — with more than two months to go.


Traditional PIPEs (those not structured as 144-A convertible placements or Reg S placements) now total $8 billion, compared with $21.3 billion last year. Structured PIPEs, which include floating convertibles, reset convertibles, common stock with resets, and structured equity lines, are running at $1 billion so far this year, compared with a total of $3.2 billion for the year 2000.

Certain types of PIPEs, such as equity lines and so-called floorless convertibles (debentures where no minimum share price is set for conversion) have come under increasing criticism because of allegations that they are sometimes associated with short-selling that sends the issuing company into a "death spiral."

But statistics and anecdotal evidence suggest that all types of PIPEs are here to say. The year 2000 was a peak year for the number of structured equity line financings, with 149 closed so far. But this year may produce even higher numbers, with 118 equity lines closed as of the end of September.

Figures for another popular form of PIPE, convertible debentures, also remain high, although the trend to date indicates the number of deals this year will be lower than in 2000. A total of 220 deals for fixed, floating, and reset convertibles have been closed so far this year, compared with 436 last year. Demand for fixed convertibles has held up the strongest, with a substantial drop in deals for floating and reset convertibles.

The types of companies hard-hit by last year's Nasdaq slump are the ones mostly seeking financing through PIPEs, according to PlacementTracker figures. Internet-related companies, from Internet application software providers to Internet security services companies, have signed up for 23.5% of the equity lines and 27% of the various convertible debentures closed in 2000.

Software and computer-related companies took up a fifth of the equity lines and about 13% of the convertible debentures. Other frequent PIPE clients included middle-market biotechnology, pharmaceutical, healthcare products, telecommunications and retail companies.


These same industries continue to show the highest demand for PIPEs in 2001, with Internet taking 22% of the equity lines and 16% of the convertibles, and computer and software using 16% of the equity lines and 15% of the convertibles to date.

John Wittwer, CFO of Alpnet Inc., said that the Salt Lake City-based provider of computerized translation and other language-based services for international trade benefited from its convertible debenture, arranged in mid-2000 by New York investment bank Ladenburg Thalmann & Co. Inc. with two investment funds in the U.S. and overseas.

"It was a very straightforward investment, and we developed a close relationship with the overseas fund," Wittwer said. "We'd worked with another firm on the West Coast, and it fell through, but Ladenburg came through for us, and I'd recommend them to anyone."

One financing actually resulted in the development of a close friendship. Grant Kesler, president and CEO of Metalclad Corp., says a convertible debenture with an overseas fund pulled his company through a financial crisis it might not have otherwise survived.

Back in 1997 Metalclad, a Newport Beach, Calif.-based asbestos-abatement firm, obtained overseas funding for expansion of a project in Mexico through a London investment fund, Oakes, Fitzwilliams & Co. One of the investments was a convertible debenture from Ultra Pacific Holdings SA, a fund set up under the Liechtenstein firm of Dr. Dr. Batliner & Partner, which has recently come under investigation in Europe for allegations of money laundering.

Unlike many Batliner funds, the ultimate investor in this case was known. He was a Norwegian businessman, Jan Sundt, who took a strong personal interest in the Mexico project for moral and environmental reasons, and even visited Mexico himself.

Two years later, when Metalclad ran into trouble with a long-standing Nafta claim, Sundt came through with another convertible debenture. Metalclad finished paying off the financings this summer.

"Jan Sundt is a friend for life," Kesler said. "I have spent my adult life doing financings, and I recognize the potential for abuse. We came close to a horrible experience. But Sundt saved our company."


Other companies haven't been so fortunate. Customer relationship management software provider Sedona Corp. last week announced it had requested investigations by the U.S. Securities and Exchange Commission and the national Associations of Securities Dealers regarding alleged improprieties in the trading of its stock. The King of Prussia, Pa.-based company said that pending an investigation it would not honor requests for conversion of its outstanding convertible debentures.

The Daily Deal reported last Friday that 60 companies, including Sedona, had been identified as market recipients of PIPE financings from trust companies established by Dr. Dr. Batliner & Partner, an offshore law firm, and Rhino Advisors' Amro International. The report, a copy of which has been obtained by The Daily Deal, had been sent to U.S. regulatory authorities and the Senate Permanent Sub-committee on Investigations.

Another corporate executive, who requested that neither he nor his company be identified, said he had "only the highest regard" for Thomas Badian, president of Rhino Advisors, after arranging an equity line with Amro International. "Rhino's dealings with us have always been above-board and high quality."

The executive added that PIPE financings often exacerbate pressure on a stock in a bad market. "If a company is stupid enough to get financing and then not perform, it's their own fault if the investors sell off their stock."

A number of other company executives, while not enamored of PIPEs, acknowledged that alternatives are simply not available to many middle-market companies in the current economic environment.

"It's like someone going to a high-interest lender when he can't get a conventional loan from a bank," said one executive. "It's expensive, but it may be the last chance you have to save your company."


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