Download Clean Tech - GreenWorld Capital, LLC

W E B I N A R TWO
Current Financing Strategies for
Public Companies
March 5, 2009
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Current Financing Strategies for Public
Companies: PIPES and Other Alternatives
While public equity and debt capital are scarce,
billions of dollars of private capital targeted for
clean tech have been raised and are sitting on the
sidelines. Hear how public companies can access
the capital they need to survive and prosper in
today's environment and how investors can benefit
from those same financing instruments.
7
Please join us at Noon* on….
• March 19th for Project-Based Financing
• April 2nd for M&A
To register for any of these webinar, please contact
Brian Dolan at [email protected].
* EST
8
Webinar One Participants
Moderator:
David W. Elkin, Managing Director, GreenWorld Capital, LLC
Speakers:
Andrew Cherry, Tax Managing Director, KPMG LLP
Robert A. Friedel, Partner, Pepper Hamilton LLP
Michael J. Howe, Managing Director, GreenWorld Capital, LLC
Brian F. Hughes, Partner, KPMG LLP
Brian M. Katz, Partner, Pepper Hamilton LLP
Karl K. Richter, Senior Energy Advisor, GreenWorld Capital, LLC
9
Summary: Webinar 1
• ARRA provides a strong fundamental backdrop for clean
tech but funding mechanics are TBD
• Solar, wind and smart grid are among the beneficiaries
• Nearly $500 B of funding has flowed into the clean tech
sector but recently the trend is down
• Project and early-stage financing is very tight
• The secondary public markets are volatile and the equity
capital window for the primary public markets is essentially
closed
… what’s a public company to do?
10
Agenda
•
•
•
•
11
The Big Picture
Focusing on Details
Case Study: Pulling it Together
Q&A
Agenda
• The Big Picture
– What is a PIPE?
– The Case for PIPEs
– Snapshot of the PIPE Market
– PIPEs in Clean Tech
– Issuer & Investor Perspectives
• Focusing on Details
• Case Study: Pulling It Together
• Q&A
12
Clean?............Tech?
13
What is a PIPE?
Private Investment in Public Equity
• Issuer sells securities privately under Reg. D
• At closing, issuer gets $$s and investor gets
restricted securities at discount to market price
• Issuer agrees to promptly file a resale
registration statement with SEC to permit resale
upon effectiveness
14
The Case for PIPEs
PIPEs:
• Are an established source of Post-IPO equity
financing
Since ‘05, 3 of every 4 Post-IPO financings have been
PIPEs
• Account for a substantial segment of the capital
markets
Since ‘05, $500B (or $4 of every $9 raised) have been
thru PIPEs
• Provide “discounts” to already attractive public
valuations
PIPE investors typically buy $1.00 of securities for $0.70
to $0.85
15
The Case for PIPEs
• Can be executed quickly and discretely
Deals can be negotiated, documented and closed within
weeks
• Offer a surer, faster path to liquidity than private
equity
Shares generally become registered within 120 days of
closing
• Are an effective means to establish a meaningful
position (….a VIPE?)
Unlike open market purchases, PIPEs do not drive up
purchase price
16
CleanTech (NEX): Currently a 20+%
Discount to Nasdaq 100 (NDX)
Price/EBITDA multiple of NEX (white) compared to NDX (orange), 2006 – present
[NOTE: green gap is discount for NEX & red gap is premium; source: Bloomberg]
17
Clean Tech (NEX): Trading at Market
Multiple (vs. SPX)
Price/Sales multiples of NEX (white) compared to S&P 500 index (orange), 1999–present
[NOTE: green gap is discount for NEX & red gap is premium; source: Bloomberg]
18
Internet /Technology: Shares Still Trading Over
2x the Market Multiple (vs. 10x in the ‘00 Bubble)
Price/Sales multiples of Bloomberg US Internet Index (white) compared to S&P 500
index (orange), 1999 – present
[NOTE: green gap is discount for NEX & red gap is premium; source: Bloomberg]
19
Clean Tech (NEX): Trading in Line w.
Internet/Technology Sector
Price/EBITDA multiples of NEX index (white) compared to Bloomberg BUSNET index
(orange), 2006 – present
[NOTE: green gap is discount for NEX & red gap is premium; source: Bloomberg]
20
Clean Tech Core Growth (30+%) Easily
Beat Tech Growth (~9%)
In 2008, installed unit generating capacity grew approx +55%
YoY for Solar* and approx +30% YoY for Wind
Solar (GW)
Wind (GW)
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
100
90
80
70
60
50
40
30
20
10
2005
Germany
2006
Spain
US
2007
Japan
2008
ROE
ROW
0
2005
Germany
2006
Spain
2007
US
India
2008
China
* Sources for charts: Solarbuzz and Deutsch Bank & Global Wind Energy Council respectively
Meanwhile:
• PC units +11% in 07, +12% in 08. Gartner forecasts –12% for 09.
• Mobile phone units +12% in 07, +6% in 08. Strategy Analytics forecasts -9% for 09.
• Semiconductor sales +3% in 07, -2% in 08. Gartner forecasts –24% for 09.
21
Snapshot of PIPE Market
• For many potential issuers, PIPEs are the only
option to raise equity capital
• The lower the market cap of the issuer, the
greater the importance of PIPEs for capital raises
• In 2008, PIPEs dominated the under $250MM
market cap sector - - approx. 95% of all deals
closed & 68% of all dollars raised in cohort
22
Snapshot of PIPE Market
• Common stock & convertible debt (+ a warrant
kicker on either) accounted for approx. 3 of every
4 PIPE deal structures in 2008
• As 2008 progressed, the share of convert deals
rose as common share fell
• PIPEs’ share of the overall corporate financing pie
is growing as activity slows; YTD ’09, 80+% of ALL
Post-IPO deals (regardless of mkt. cap)
23
Recent Market Activity: PIPEs raised
$500 B (or 43% of all Post-IPO capital)
Post-IPO Equity Raises 2005-2008
$ 1.1 Trillion
12,000+ Transactions
25%
Follow-On
PIPE
57%
Follow-On
43%
PIPE
75%
Source: CapitalIQ
PIPE data excluding TARP and Sovereign Wealth Funds
24
Recent Market Activity: PIPEs are only game for
small cap companies - - 95+% of deals
2008 Deal Volume Breakdown: PIPEs vs. Public Follow-Ons
Market Cap > $5B
Follow-on
PIPE
Approx. 50% PIPEs
Market Cap $1-4.9B
Follow-on
PIPE
Market Cap $500-999M
Follow-on
PIPE
Market Cap $250-499M
Follow-on
PIPE
Market Cap $100-249M
Follow-on
PIPE
Approx
. 95%
PIPEs
Market Cap $50-100M
Follow-on
PIPE
Market Cap <$50M
Follow-on
100%
80%
60%
40%
20%
PIPE
0%
20%
40%
60%
80%
100%
Source: CapitalIQ
PIPE data excluding TARP and Sovereign Wealth Funds
25
Recent Market Activity: Convertible
Debt Share Grew Throughout ‘08
% of PIPE Deals by Security Type
70%
60%
50%
% of Deals
Common Stock
40%
Preferred Stock: Convertible
30%
Preferred Stock: nonConvertible
Debt: Convertible
20%
Debt: non-Convertible
10%
0%
Q1-Q3 2008
Q4 2008
Time Period
26
Source: DealFlow
Recent Market Activity: PIPEs’
Share Grew as Deal Volume Fell
Post-IPO Public Equity Transaction Volume by Quarter
1200
1000
-66% over 7 quarters
# of Deals
800
600
Follow-on
PIPE
400
200
0
Q1-07
Q2-07
Q3-07
Q4-07
Q1-08
Q2-08
Q3-08
Q4-08
Source: CapitalIQ
PIPE data excluding TARP and Sovereign Wealth Funds
27
Current Market Activity: The Trend
Continues in ‘09
Post-IPO Public Equity Transaction Volume YTD Jan. 1 - Feb. 9
400
350
300
- 66% YoY
# of Deals
250
200
Follow-on
PIPE
150
100
50
0
2008
28
2009
Source: CapitalIQ
PIPE data excluding TARP and Sovereign Wealth Funds
PIPEs in Clean Tech
• Since 1/1/05 in GWC’s Clean Tech Universe (~
330 companies), 260+ PIPE transactions have
raised $18.9B
• 110 companies closed PIPEs (~ 60 companies
closed multiple deals)
• Purchased at discounts to compelling public
company valuations
• Deal size and issuer size statistics for the clean
tech sector compare very favorably to broad
PIPE universe
29
Clean Tech vs. Overall PIPE Market:
Clean Tech PIPE Stats Compare Very Favorably
Deal size and issuer size since 1/1/05:
•
Deal size:
- avg.
- median
- upper quartile
- lower quartile
Overall*
~ $ 56 MM
~ $ 4 MM
~ $ 17 MM
~ $ 1 MM
Clean tech**
~ $ 71 MM √
~ $ 11 MM √
~ $ 35 MM √
~ $ 3 MM √
•
Issuer market cap:
- avg.
- median
- upper quartile
- lower quartile
~ $505 MM
~ $ 11 MM
~ $ 60 MM
~ $ 2 MM
~ $819 MM √
~ $ 43 MM √
~ $199 MM√
~ $ 12 MM √
* n> 9000 closings
** n> 260 closings
30
Source: CapitalIQ
Issuer Perspective
•
•
•
•
•
31
Deal structure / security type
Pricing: “Market” price vs. discounts; warrants
Regulatory process & issues
Cost & speed
Post-closing timeline
Investor Perspective
• Structures, investment horizon & risk-reward
profile
• Trading off discount for warrant coverage
• Exit via the “market”: Liquidity / trading stats
• Registration timing / market risk
• Follow-on financing & timing
• The “syndicate” (vs. a group)
32
Agenda
• The Big Picture
• Focusing on Details
– Regulatory Framework
– Accounting Considerations
• Case Study: Pulling it Together
• Q&A
33
Regulatory Framework
•
•
•
•
•
•
•
34
Securities Act Overview
Stock Exchange Requirements – 20% rule
Rule 144
Treatment of Warrants
Reg. FD and Rule 10b-5
Short Sale Strategies
Other regulatory issues
Regulatory Framework
• Securities Act Overview
– Reg. D Private Placement
– S-3 Resale Registration
– Small cap issuers limited to 1/3 of public float
•
•
•
•
•
•
35
Stock Exchange Requirements – 20% rule
Rule 144
Treatment of Warrants
Reg. FD and Rule 10b-5
Short Sale Strategies
Other regulatory issues
Regulatory Framework
•
Securities Act Overview
• Stock Exchange Requirements – 20% rule
– Shareholder approval required if shares plus warrants >
20% of O/S, sold at discount
– Sale of 20% of voting stock may be deemed a change in
control, requiring shareholder approval
•
•
•
•
•
36
Rule 144
Treatment of Warrants
Reg. FD and Rule 10b-5
Short Sale Strategies
Other regulatory issues
Regulatory Framework
•
•
Securities Act Overview
Stock Exchange Requirements – 20% rule
• Rule 144 – Without resale registration:
– Shares of reporting company may be resold after six
months
– Shares of non-reporting company may be resold after
one year
•
•
•
•
37
Treatment of Warrants
Reg. FD and Rule 10b-5
Short Sale Strategies
Other regulatory issues
Regulatory Framework
•
•
•
Securities Act Overview
Stock Exchange Requirements – 20% rule
Rule 144
• Treatment of Warrants
•
•
•
38
– Valued at 12.5 cents, plus intrinsic value
– Not counted if deal is not discounted and warrants not
exercisable for six months
Reg. FD and Rule 10b-5
Short Sale Strategies
Other regulatory issues
Regulatory Framework
•
•
•
•
Securities Act Overview
Stock Exchange Requirements – 20% rule
Rule 144
Treatment of Warrants
• Reg. FD and Rule 10b-5
– Selective disclosure of material non-public information
not permitted
– Pending PIPE transaction may be material
– Issuers should obtain confidentiality commitments from
prospective investors
•
•
39
Short Sale Strategies
Other regulatory issues
Regulatory Framework
•
•
•
•
•
Securities Act Overview
Stock Exchange Requirements – 20% rule
Rule 144
Treatment of Warrants
Reg. FD and Rule 10b-5
• Short Sale Strategies
– Short sales may not be covered with PIPE shares
– Sell PIPE shares under S-3, then buy shares on market to
cover shorts
•
40
Other regulatory issues
Regulatory Framework
•
•
•
•
•
•
Securities Act Overview
Stock Exchange Requirements – 20% rule
Rule 144
Treatment of Warrants
Reg. FD and Rule 10b-5
Short Sale Strategies
• Other Regulatory Issues
– Schedule 13D or 13G – More than 5% of class of equity
securities
– Section 16 – short-swing profit disgorgement for 10%
shareholders and insiders (including deputized directors)
– Other Structures
41
Regulatory Framework: Other Structures
• Registered Direct Offering
Issuer negotiates with a limited group of investors. Security
is issued under an existing and effective registration
statement. Essentially a traditional add-on offering
marketed to, and negotiated with, a select investor
universe vs. broad marketing from an institutional and retail
sales force.
• Equity Credit Line
A contractual agreement between an issuer and investor
that enables the investor to purchase a formula-based
quantity of stock at set intervals of time at future stock
prices. An effective registration statement must be
maintained in order for take downs to be completed.
42
Accounting Considerations*
• Highlights of different structures
• Tax loss carryforwards & IRS Code Sec. 382
*Issuer’s perspective
43
Accounting Considerations
•
44
CAVEAT - It is noted that the accounting issues surrounding
instruments such as convertible debt and warrants are very
complicated and require careful consideration. The following
summary serves to illustrate certain considerations to examine;
however, the accounting for each transaction is dependent upon
that specific fact pattern and should not be extrapolated to other
“similar” transactions. Please discuss any proposed transaction
with your accounting advisor prior entering into any contractual
agreements.
Accounting Considerations*
• Highlights of different structures
- Types
Common stock (w. warrants)
Convertible Debenture
- Issues
Warrant classification
Treatment of the conversion feature
- Areas that impact the issuer
Balance sheet classification
Impact on reported income
Earnings per share
•
Tax loss carryforwards & IRS Code Sec. 382
*Issuer’s perspective
45
Accounting Considerations
Warrant Issues
•
Derivative and Liability Issues
–
–
–
46
Warrant must be considered indexed to the issuing Company’s own stock per EITF 07-5 and
be considered to be an equity instrument per the requirements in EITF 00-19 in order for the
option to not be treated as a derivative
Items that could be issues include –
• Down round protection on exercise prices
• Upon exercise a requirement to physically deliver only registered shares
• Upon exercise a requirement to a net-cash settlement (including a requirement to net
cash settle if an event occurs and it is outside the control of the company)
If these provisions are not met, the warrant will be accounted for as a derivative at fair value
with changes in fair value being recorded in earnings (other expense)
Accounting Considerations
Convertible Debt Issues
• Historical Accounting
• Changes Effective January 1, 2009
– Convertible Debt that must always be settled in stock
– Convertible Debt that has cash settled and partially settled
conversion options
• Instrument C – Par value in cash and conversion spread in cash
or stock
• Instrument B – Entire obligation is settled in either cash or stock
• Instrument X – Entire obligation can be settled in any
combination of cash or stock
47
Accounting Considerations
Convertible Debt Issues
• Derivative Issues
– Conversion option must be considered indexed to the issuing
Company’s own stock per EITF 07-5 and be considered to be an
equity instrument per the requirements in EITF 00-19 in order for the
option to not be treated as a derivative
• The provisions within these Issues are very detailed and require
a comprehensive analysis to ensure proper accounting
treatment
– If these provisions are not met, the conversion option will be
accounted for as a derivative at fair value with changes in fair value
being recorded in earnings
48
Accounting Considerations
Convertible Debt Issues (continued)
•
49
Cash-Settled and Partially Cash-Settled Conversion Options
–
New guidance in FASB Staff Position APB 14-1 requires bifurcation of the debt
component (liability) and conversion feature (equity if not a derivative)
• The FSP is only applicable if the conversion feature is not a derivative. If it
is a derivative, the derivative is recorded at fair value with changes in fair
value being recorded in earnings and the liability is recorded at its gross
amount with a discount equal to the fair value of the derivative.
–
Discount is recorded as difference between proceeds received and what would
have been received had the conversion option not been included
• Leads to increased interest expense (and therefore reduced EPS) as
discount is amortized along with interest payments
–
Treasury method of reporting EPS is allowed for cash-settled (Instrument C or
Instrument X) convertible debt, otherwise, the if-converted method is required
per EITF 90-19
Accounting Considerations*
• Highlights of different structures
• Tax loss carryforwards & IRS Code Sec. 382
– IRS Code 382
– NOL Case Study
*Issuer’s perspective
50
Internal Revenue Code Sec. 382
• Under IRS Code sec. 382, if a greater than 50%
ownership change takes place with respect to a
5% or more shareholder over a 3 year period, a
limitation is placed on the corporation’s ability to
utilize its pre-ownership change net operating
loss (“NOL”) carry forward on a yearly basis.
• The yearly limitation equals the pre-ownership
change value of the corporation multiplied by an
interest rate that is published monthly by the
Internal Revenue Service (the “Long Term Tax
Exempt Rate”)
51
Code Sec. 382 – Case Study
• Example:
– Corporation A is a public company. A does not have
any shareholder who owns greater than 5% of its stock.
– On 1/1/09 A issues Series A preferred stock to PE
Fund Y in a PIPE transaction representing 35% of the
value of A.
– On 1/1/10 A issues Series B preferred stock to PE
Fund Z in a PIPE transaction representing 25% of the
value of A.
– As a result of the issuance of Series B preferred an
ownership change has taken place on 1/1/10 because
PE Funds Y and Z have collectively acquired 55% of A
over a 3 year period.
52
Code Sec. 382 – Case Study
On 1/1/10 the pre-money value of A was $100,000,000 and its
NOL carry forward was $20,000,000
Yearly Limitation
Pre money value of A
Long term tax exempt rate
Yearly limit on use of pre-change NOL
$100,000,000
4%
$4,000,000
Note: Does not take into account potential increase under IRS Notice 2003 – 65.
53
Code Sec. 382 – Case Study
• In 2010 A earns taxable income of $10,000,000.
Although A’s NOLs are $20,000,000, it can only
use $4,000,000 of its pre ownership change
NOLs to offset its income.
• The remaining NOLs are carried forward.
54
Agenda
• The Big Picture
• Focusing on Details
• Case Study: Pulling it Together
– Post mortem of Ener1’s (HEV) Nov. 2007
deal
• Q&A
55
Case Study: Pulling it together
• Post mortem of Ener1’s (HEV) Nov. 2007 PIPE
deal
– Size: $32.0MM transaction
– Structure: Common stock @ 18% discount with 90%
warrant coverage (6 mo. warrants)
– Investors: Top 3 investors accounted for over 80% of
deal (plus 6 other institutions)
– Timeline: Announcement & Closing 11/19/07, Filing
1/18/08 & Effectiveness 3/31/08
– 4th PIPE in 32 months: $10MM in 9/07, $11MM in 2/07
& $14MM in 3/05
56
Investors in HEV’s PIPEs Made Money
$14m
PIPE
$32m
PIPE
$10m
PIPE
$11m
PIPE
57
57
Agenda
• The Big Picture
• Focusing on Details
• Case Study: Pulling it Together
• Q&A
58
Please join us at Noon* on….
• March 19th for Project-based Financing
• April 2nd for M&A
To register for any of these webinar, please contact
Brian Dolan at [email protected].
e mail addresses of presenters?
Thank You!
* EST
59
Supplementary Data: Stats & Trends
• Activity
• Valuation
60
Recent Market Activity: Large cap
dominates $$ but small cap vol.
2008 PIPE $$s by Market Cap
2008 PIPE $$s by Market Cap
# of 2008 PIPE Transactions by Market Cap
Less than
$50 M
$50 - $99
M
$100 $249 M
$250 $499 M
$500 $999 M
Less than$1
$50
M B
- $4.9
$50 - $99Greater
M
thanM$5 B
$100 - $249
$250 - $499 M
$500 - $999 M
$1 - $4.9 B
Greater than $5 B
61
Source: DealFlow
Recent Market Activity: Common Stock has
been the structure of choice
CY2008 PIPE Deal Breakdown:
% of Total # Deals (1,143)
Other
12.5%
Debt: Convertible
21.4%
Preferred Stock:
Convertible
13.5%
62
Common Stock
52.6%
Source: DealFlow
VC Valuations:
Traditional Technology vs. Clean Tech
VC Valuations: Traditional Tech vs. Clean Tech
Median Pre-money Valuation (in $MM)
$35
$30
$25
$20
Traditional Tech Cos.
Clean Tech Cos.
$15
$10
$5
$0
2001
63
2007 (1st half)
Source: MoneyTree