Feb 27 A growing number of U.S. listed public
companies are changing the way they issue shares to reduce their
underwriting costs and protect themselves from big market
The switch often makes sense for companies, but for Wall
Street banks, it stings, further pressuring stock underwriting
revenue that has not recovered five years after the financial
crisis. The different method of issuing shares, called
"at-the-market offerings," involves selling stock on the open
market at the prevailing market price, typically in small
amounts over weeks or even months, instead of marketing a big
block over weeks and selling the shares in a single afternoon.
The trend has been quietly building for some time, but has
really taken off in the past few years. In 2012, the number of
at-the-market offerings grew 25 percent from the prior year.
Of stock issues from public U.S. companies, 22 percent were
at-the-market offerings last year, up from 4 percent in 2007,
according to data from capital markets research firm Ipreo and
the investment bank MLV & Co, which focuses on these types of
Underwriters may have only themselves to blame for the
growth of these offerings. Historically, it was usually only
smaller companies that used at-the-market offerings to raise
capital. Most big investment banks did not even offer
at-the-market deals to their clients.
But during the financial crisis, at-the-market deals made a
lot more sense. Markets fluctuated wildly, and it was risky to
do a traditional underwritten deal that relied on demand being
strong on a particular day. In 2009, Bank of America Corp
and other Wall Street firms sold billions of dollars of
shares at-the-market, and suddenly the practice seemed much more
legitimate, bankers said.
Other companies, including office property owner Boston
Properties Inc and electric utility Southern Company
, followed suit. More recently, companies like casino
operator Caesars Entertainment Corp and wireless
services provider Clearwire Corp have done
at-the-market offerings as well.
This method of selling shares is still favored by smaller
companies, meaning it accounts for just a fraction of overall
dollar volume of issuance. The median market cap of
at-the-market issuers is still fairly small - nearly $600
million last year compared with $411 million in 2010 - according
to MLV & Co.
The costs for the issuer can be much lower: fees are
typically around 2 percent of the money raised, compared with 4
to 5 percent for a more traditional offering. For a $100 million
offering, that amounts to a savings of $2 million to $3 million.
"It's a very low cost source of equity which was compelling
to us," said Jon Grisham, senior vice president and chief
financial officer at Acadia Realty Trust. Acadia, a real
estate investment trust that owns shopping centers, launched a
$75 million at-the-market offering in January 2012 and a $125
million at-the-market deal in August.
IN THE DRIVER'S SEAT
Standard underwritten offerings have their advantages: the
company usually knows that it will be able to sell the shares,
and often any that aren't sold to investors will be taken up by
the underwriters. But if the stock market takes a big hit just
before a share sale, and the company ends up pulling its deal,
it ends up with a black eye.
In other words, an underwritten deal can offer some measure
of certainty to the issuer, but if the market is bad on any
given day, the whole deal could end up being scotched.
In an at-the-market deal, a company typically files an
initial prospectus indicating the maximum number of shares it
plan to sell, but it need not issue the maximum. On any
particular day, the issuer has final say over how many shares it
"You can avoid the market if it's a bad day," said Andy
Sanford, head of equity capital markets at Wells Fargo & Co
In a typical share offering from a company that is already
public, "the investment bank usually dictates whether, when and
on what terms the company can sell its securities to raise
capital, but with an at-the-market offering, the company sits in
the driver's seat," said Anthony Marsico, a lawyer at the firm
Greenberg Traurig. "You don't see that in most other types of
Banks are not always excited for their client to be in the
driver's seat when it results in lower fee income. Wall Street's
stock underwriting business has also been under pressure from a
decline in initial public offerings.
Fees for U.S. listed IPOs, traditionally the most lucrative
source of profit from stock underwriting businesses, fell 19
percent last year to $1.8 billion, the lowest level since 2009,
according to Thomson Reuters data.
Still, banks feel they have little choice but to sell shares
for clients through at-the-market deals.
"Many underwriters have come to realize that they need to be
able to be able to offer this service to clients because
managements and boards are becoming more attuned to the benefits
of the product," said Michael Cippoletti, head of U.S. equity
capital markets at BMO Capital Markets in New York.
Another form of issuing, known as block trading, also puts
pressure on underwriter income.[ID: nL1E8MR8HB]. These deals,
where the bank buys a block of shares from an issuer in a single
transaction and then sells the stock to clients, typically offer
returns of around 2 percent for the bank.
To be sure, there have been some big traditional follow on
stock sales in recent weeks from companies. Michael Kors
Holdings Ltd, for example, raised $1.5 billion in a
share offering last week. So far this year, public companies
have sold $23.8 billion of shares, marking the best start to a
year for secondary offerings since 2000, according to Thomson
But with more secondary offerings coming in the form of
block trades or at-the-market deals, fee income this year is not
likely to be as strong as might be otherwise expected, bankers
Fee pressure has spurred some banks to scale back their
equity capital markets business, which does traditional stock
Royal Bank of Scotland Group PLC, for example, said
last year it would exit equity capital markets globally.
Although at-the-market offerings are traditionally used by
companies that need to continually access the capital markets
such as real estate investment trusts and energy companies,
issuers across a range of industries including shipping and
industrials are also considering the product, say bankers.
"The cat's out the bag, the genie's out of the bottle," said
Todd Wyche, CEO of Brinson Patrick Securities which specializes
in at-the-market transactions for clients.