'Crossing the Wall' To Get A Deal Done
Before diving in with formal offerings, I-bankers and issuers are 'pre-marketing' deals to investors first
June 5, 2009
The way that financial institutions have been raising capital in the equity markets lately, one might think the comfort level once felt among investment bankers, issuers and attorneys has returned. Alas, all three parties are still leery of diving back in, which is why issuers are increasingly relying on something known as wall crossing, or confidentially pre-marketing follow-on equity deals as a way to gauge investor interest before formally launching a deal.
These wall crossings come despite the $56 billion that the banks who were part of the government's stress test have raised in equity since April, according to Dealogic. The filings have been coming fast and furiously, mainly from companies feverishly trying to repay Troubled Asset Relief Program funds or others trying to prevent a bankruptcy filing.
JPMorgan announced on Monday it raised $5 billion in capital in an attempt to repay Tarp funds, followed closely by American Express, which raised $500 million. The deals took the markets by surprise, leading some to believe that the transactions were probably wall-crossed deals. (JPMorgan and American Express did not return calls for comment.)
"I can virtually assure you that they were," says one attorney in the capital markets. "Neither of the deals were pre-announced, and both were very large deals that came to market very quickly." In more normal market times, issuers typically issue a press release after the close of the trading day and try to move shares as a large block.
Wall-crossed deals were born out of the market dysfunction of 2008 when the capital markets were essentially closed and market volatility ran wild. More specifically, the trend of wall-crossed deals began in earnest following the Lehman Brothers bankruptcy filing. From Sept. 15 through the end of December 2008, for instance, five out of seven follow-on offerings that were priced in excess of $250 million were confidentially pre-marketed by the issuer, according to Morrison & Foerster.
"When the markets opened in 2009, there was still a lot of volatility. It was scary times as far as doing equity offerings," says David Goldschmidt, a partner with law firm Skadden Arps.
In a bid to balance corporate America's need to tap the capital markets versus experiencing a failed offering, investment banks and attorneys designed the wall-crossing mechanism. "The window of opportunity is slim and issuers want to make sure when they go out with a deal that they are going to succeed," Anna Pinedo, a partner with Morrison & Foerster, says. "Companies don't want to share with the public that they've been unsuccessful. There is a stigma attached to having had a deal not proceed for lack of interest."
Others agree. "If you go out and a deal is perceived to be a failure because it was priced way off the market, for instance, it would completely undercut the whole purpose for doing it, which is to build confidence," says Michael Urfirer, co-chairman and co-chief executive at Stone Key Partners LLC. "The point of the offering is to build capital but there is also a message associated with it and that is you're bolstering capital to give the investor confidence that the company is well-capitalized."
In a wall-crossed deal, investment bankers confidentially approach a select group of institutional investors on behalf of an issuer. These investors typically include mutual funds and hedge funds that are among the issuers' largest shareholders, private-equity investors and sovereign wealth funds. Essentially, bankers ask the investors if they are willing to sign a confidentiality agreement about an unknown company that is considering an offering.
If the investor agrees, an e-mail is typically exchanged to confirm the arrangement. Investors are brought "over the wall" when they agree to the confidentiality terms, and are provided with material, non-public information about the issuer. They in turn must keep the MNPI confidential and agree not to trade while in possession of the information, or throughout the wall-crossed transaction, which can be as quick as one trading day or as many as several days. This is to avoid an instance of insider trading and becomes even more critical when fund managers are approached about an issue that is widely traded among a group of traders on that desk. The issuer's stock will likely appear on the investment manager's internal watch list, so the compliance department can monitor trading while those involved are restricted from trading altogether.
Once the name of the issuer is disclosed, the bankers begin to measure investor interest, asking them direct questions: Would they be interested in buying the security, and if so at what price? They may ask the investor about concerns they might have about the company, generating as much feedback as possible.
"Investment bankers are trying to bring people together who need capital versus people who can provide it and they're doing it within the law. It's another way of thinking outside of the box during times of stress to get the capital markets working," says Goldschmidt.
Two sectors where wall-crossed deals are prevalent are real estate and financials. "There are still a lot of financial institutions trying to raise cash to address stress-test results. We also have been talking with a number of real estate investment trusts that are eager to raise additional capital. We have suggested it to a number of issuer clients," Pinedo says.
And even though wall-crossed deals come to market about 90% of the time they are initiated, when investor appetite is low, there are consequences. The issuer must file an 8K form with the SEC disclosing the information they provided to select investors on a confidential basis by the opening bell of the next trading day. "These investors want to start trading again. They agreed to sit on the sidelines for a day but by the time the market opens for business the next day they don't want to be restricted," Goldschmidt says.
Federal Realty Investment Trust may have gotten a taste of that recently after it explored the possibility of completing a "modest common equity raise, which included discussions about our business with select investors," according to an 8-K filing with the SEC. The REIT pulled the deal, however, due to a "substantial decline" in its shares, the filing read.
(c) 2009 Investment Dealers' Digest and SourceMedia, Inc. All Rights Reserved.
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