Thanks to a novel technique from a US fund, the liquidity of a company’s traded shares can be viewed as an asset. It’s a technique, which is potentially less dilutive than rights issues and can be quicker to arrange, and some companies are turning to it as a source of working capital. Justin Pugsley finds out more.

Working capital is in short supply and raising it is forcing some companies to contemplate quite extreme measures, usually involving asset disposals (at depressed prices) and the laying off of staff.

Stock market-listed companies have some advantages over their privately held counterparts. The greater transparency of their accounts and their need to comply with corporate governance standards often makes them a better prospect for lenders. Also, they can under certain circumstances turn to their shareholders, as a great many companies have already been doing.

It is against this grim economic environment that Yorkville Advisors has decided to more aggressively market a complement, or alternative, to the rights issue, which it calls the Seda, or standby equity distribution agreement. In essence, it enables listed companies to issue new shares in tranches to Yorkville rather than staging a one-off potentially highly dilutive and deeply discounted rights issue. Some rights issues are being done at 40-50% discounts to already very low share prices. It is among a suite of products from Yorkville, which cover more familiar areas such as bridging loans. Another route is through private placements, but for these to work, very much depends on the goodwill of existing large investors.

As a means of financing, a SEDA is particularly appropriate for companies that don’t need a large sum of capital upfront but can receive it in phased tranches, such as for boosting working capital levels. These may include biotech companies developing new compounds, oil explorers, or other project-orientated companies that need cash to tie them over.

One UK-listed firm that has made use of it is Emed Mining. It is a small AIM-listed explorer with copper and gold projects in Cyprus, Slovakia and Spain among its interests. It says it has the potential to recover at least 150,000 tonnes of copper and 1 million troy OZ of gold.

In June last year, it drew down US$100,000 on its SEDA facility with Yorkville placing 197,762 ordinary shares at an average price of 25.5 pence each. The set-up of the loan agreement was announcement in December 2007.  The group also uses other mechanisms for raising finance and SEDA is just one of those.

A number of companies are also using Sedas to build up takeover funds. The product is mainly targeted at mid-sized fast-growth companies, but is also available to very large enterprises.

One of the benefits of Seda is that it doesn’t necessarily involve creating a huge dent to the share price from placing a heavily discounted new issue, and it avoids the necessity of exhausting road-shows, temporarily having to take the eye off the ball and the high advisory fees.

Management likes it

“Existing shareholders like the Seda because it’s less dilutive and managements like it because it gives them more control over the amount raised, the pricing of new shares and it is flexible,” explains Paul Strzelecki, managing director, Yorkville Advisors UK.

“Once the facility is in place, companies can draw down cash with just 10 days notice,” he adds. A company cannot draw on the facility more than once every two weeks and the amount cannot exceed 10% of the average traded volume of its shares. It’s also a way of exploiting the liquidity of a company’s shares. The more liquid the stock, and the larger the trading volumes, the more shares can theoretically be placed.

“A typical Seda agreement has a two-year term, during which time a company has the right, but not the obligation, to access the facility,” says Strzelecki. He adds that Yorkville also does not seek a board seat and does not interfere with management. “We might give advice, but we’re not shareholder activists,” he says.

Many of Yorkville’s executives have industry, rather than financial backgrounds, putting them in a stronger position to understand a company’s true potential. Strzelecki, for example, built up a multi-billion dollar division of Motorola and has two technology start-ups to his name.

Yorkville charges up to 3% in fees for the Seda and expects to be able to buy the new shares at a discount of up to 10% to the share price, which is calculated according to a formula from the days when the request for funds are received, and only takes into consideration the share price over the next 10 days to calculate the purchase price.

“However, the company can nominate a minimum price that it is willing to accept and if that is hit then we can take another look at the financing,” says Strzelecki. He emphasises that Yorkville never short-sells shares and even states that as one of its contractual obligations to clients.

Although the Seda seems perfect for the times, Yorkville in fact created it eight years ago. It is also now being mimicked by other financial institutions such as JP Morgan, Bank of New York and Canter Fitzgerald, which have put together similar schemes. Yorkville has US$1bn in funds, which it does not leverage, has a presence in 20 countries and is looking to expand.

These types of funding raising schemes could well catch on and banks may end up encouraging some of their clients to pursue them. Once funds have been raised in this way, a bank may be more willing to advance funds, possibly at slightly lower margins, as a well-funded company will appear as a better credit risk. It won’t be a technique that’s suitable for everyone – for a start it only applies to listed companies – but it does nonetheless represent another source of capital.