Tough times for equity offerings bring back the art of winks and nudges

THESE days, when a publicly traded company wants to sell more stock, a delicate dance begins. An investment banker will call major investors with a pitch that is vague on some important details.

Take, for instance, an unnamed company within a certain sector that is considering a share sale. If the investors want to learn more, they will have to promise to keep any specific information about the company secret and refrain from trading on it for a while.

This exchange is called “crossing the wall”. It is like an initiation into the club of those with material, non-public information that is normally limited to corporate insiders and their closest advisors.

Bankers are responding to uncertain market conditions by ramping up these secret talks, which are both legal and sometimes necessary to avoid an all-too-public disappointment. They can happen when a company is issuing new equity or when a major shareholder is looking to move a large chunk of existing shares.

“As an issuer, the last thing you want to do is make a public announcement that you are getting ready to do an issuance and not know – or not have a high degree of confidence – that it will be successful,” said Keith Canton, head of Americas equity capital markets at JPMorgan.

During the long bull market that ended last year, companies could often count on finding buyers just by announcing sales. But the potential perils of that approach were on vivid display in March.

Silicon Valley Bank helped set off a bank run when it announced a US$1.3 billion stock offering that was not locked down. Dealmakers say that might have been less of a problem if the offering had been more fully negotiated in secret.

Still, the process carries risks. “The issue with wall crossing is it really does walk a fine line,” said Terry Johnson, a partner at Arnold & Porter Kaye Scholer, who gives legal advice to boardrooms. “You have to be very careful about following the script and the rules, because if you step over the line, you can easily veer into something actionable.”

If markets get a sense that a specific public company is about to offer shares, for example, traders might start to sell or short the stock, figuring this will dilute existing shareholders or weigh on the market. Or a clumsily handled pitch could leak other non-public information a prospective investor might be able to trade on.

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In initial public offerings (IPOs), where a company’s shares are not listed yet, there is a similar process of quietly testing the waters. Investment bankers use early-stage talks with potential buyers to measure demand before deciding to move forward. It gives issuers a better idea of what price they can get, and how many shares they can sell.

More of the IPO process has been handled in secret since the 2012 Jumpstart Our Business Startups Act, which created a process for all but the largest companies to keep their regulatory filings confidential until the final stages of their listing. Five years later, regulators changed the rules to allow issuers of all sizes to work on IPOs out of public view.

US IPOs and secondary offerings had their slowest first quarter since 2009 this year, according to data compiled by Bloomberg, as rising interest rates have heightened market volatility and risk aversion among investors.

Still, companies are as hungry as ever to raise money from investors. And as borrowing costs go up, selling shares is often the less costly way to do it.

“Equity financing is the lifeblood of early-stage companies that lack free cash flow to support debt,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. So expect the whispering on Wall Street to grow louder. BLOOMBERG