The Other ATMs

Piqued by the trio of ATM issues by one of our recommended companies, I joined a "Webinar" at which Bank of America Merrill Lynch (BAC) discussed the newly popular method of raising money by issuing new shares. Note that the mechanism is not new; just its use. ATM stands for At The Market. Merrill, or whatever you call it, is a big peddler of this fund-raising technique, and today's presentation was intended for shipping companies, which have been a big user of this system. In fact, the shipping industry is the major non-U.S. issuer of ATM stock.

U.S, issuers have mainly been banks, starting with Merrill itself, which did a test run before telling the world. Other banks including both Swiss giants are also getting into this technique but it is mainly a USA mechanism for now.

An ATM offering uses a shelf registration with our SEC but then enters limbo as the amount raised depends on daily demand for the new shares during the trading day. The volume to be issue is targetted but the daily impact is effectively unknown.

Advantages include defanging shorts, saving management time, and avoiding a visible discount in the share price. In fact, of course, the process does cut the share price. Other techniques are not working well in the present liquidity-constrained markets among them secondary offerings by prospectus and dog-and-pony shows to make the world rush to buy.

After the impact of a block trade in Barclays, you can see how appealing the ATM variation is. Instead of instant discounting as the investments banks unwind the block trade, you have a gentle fluctuation in price. And the discounting that goes on with private placements to institutional investors (another alternative way to raise funds) is also hidden, if not avoided.

But there are negatives with ATMs among other things a true legal thicket of regulations. There is ultimately no certainty about how much yu will raise at what price. The uncertainty also affects shareholders who only know what has happened after the deal is done. It is fast but not precise.

Will the new mechanism still be need if volatility falls and liquidity picks up again? Developed in late 2008 when markets were frozen, this tactic may not be needed longer term. For the record, cash-strapped DryShips has done 3 ATM issues over the past 6 months raising a total of $1.35 bn.

Comments

[User 429579:]

The method you have opted for raising the money is very popularly known that through shares.No Prescription Required

Jun 11 12:27 AM