Follow-on stock offerings aren’t what they used to be. Increasingly, companies are avoiding the traditional, months-long process of registering new offerings with the Securities and Exchange Commission and conducting investor road shows to line up buyers. Instead, they are relying on a newly streamlined shelf registration process that allows most big companies to complete deals in as little as 24 hours.
In 2006, U.S. companies raised a record $73.5 billion in follow-on stock offerings done through shelf takedowns, accounting for 69 percent of all non-IPO common stock issuance, according to research firm Dealogic (see graph).
In a shelf deal, a company first registers with the SEC a general intention to issue a range of securities in the near future. It can then issue all or some of those securities -- effectively pulling them “off the shelf” -- without having to individually register them.
Two factors are driving much of the recent surge in shelf offerings. First, companies increasingly worry that hedge funds, anticipating share dilution, will sell their shares short during the month or two it takes to complete a traditional follow-on offering. Second, new SEC rules approved in December 2005 give big corporations an express lane to the equity market: “Well-known seasoned issuers,” or WKSIs, may register shelves immediately and take down securities from them within 24 hours.
Typically, registering and issuing from a shelf can take weeks. In passing the rules that compress the timetable for WKSIs, the SEC reasoned that the less formal process is justified for companies that have established a degree of market credibility and regularly make financial disclosures. To gain the WKSI designation, businesses must have been publicly owned for at least a year and have market values greater than $700 million. Private or newly public companies may qualify if they have issued $1 billion in nonconvertible bonds in the past three years.
That flexibility came in handy last month for AvalonBay Communities, a real estate investment trust. After the markets closed on January 3, the company learned that it was being added to the Standard & Poor’s 500 index, a development that typically prompts a wave of buying interest from index funds and other money managers. Anticipating that demand, AvalonBay registered a WKSI shelf with the SEC on January 8 and sold 4.6 million common shares the next day, raising $594 million. A conventional offering, or even a non-WKSI shelf, would not have allowed the company to tap the market so opportunistically.
“You don’t get a lot of advance notice about the S&P 500,” says AvalonBay CFO Thomas Sargeant. “So the best example of why you’d want something like a WKSI shelf is an S&P 500 trade.”
Not all WKSI shelf offerings are done overnight. Some companies choose to support them with a brief road show. Still, using the designation gives the issuer maximum control over the timing of an offering. It also lets companies omit a lot of standard prospectus information from their deals, further streamlining the process.
A separate reason for the upswing in shelf takedowns is a change in companies’ perceptions about their effect on stock prices. Historically, some executives have worried that merely establishing a shelf created an expectation of future dilution and drove investors to sell. During the past few years, however, companies have shaken off that belief. Today most eligible businesses -- those that have been public for one year and are not in default on any financial obligations -- establish shelves whether they want to use them or not, says Anna Pinedo, an attorney in Morrison & Foerster’s New York office. That keeps investors from homing in on shelves as proof of pending dilution.
“What has really changed is how the market views shelf registrations,” says Pinedo.
Deal makers expect the increase in shelf issuance to continue. One big future source of deals: the raft of big companies going private, many of which will be floated on the public markets again in a few years. Buyout firms typically hang on to a portion of their stakes after IPOs and sell them later through a follow-on. Virtually all of these companies have large amounts of public debt and qualify as WKSIs.
