The switch often makes sense for companies, but for Wall Street banks, it stings, further pressuring stock underwriting revenue that has not recovered five years after the financial crisis. The different method of issuing shares, called "at-the-market offerings," involves selling stock on the open market at the prevailing market price, typically in small amounts over weeks or even months, instead of marketing a big block over weeks and selling the shares in a single afternoon.
The trend has been quietly building for some time, but has really taken off in the past few years. In 2012, the number of at-the-market offerings grew 25 percent from the prior year. Of stock issues from public U.S. companies, 22 percent were at-the-market offerings last year, up from 4 percent in 2007, according to data from capital markets research firm Ipreo and the investment bank MLV & Co, which focuses on these types of transactions.
Underwriters may have only themselves to blame for the growth of these offerings. Historically, it was usually only smaller companies that used at-the-market offerings to raise capital. Most big investment banks did not even offer at-the-market deals to their clients.
But during the financial crisis, at-the-market deals made a lot more sense. Markets fluctuated wildly, and it was risky to do a traditional underwritten deal that relied on demand being strong on a particular day. In 2009, Bank of America Corpand other Wall Street firms sold billions of dollars of shares at-the-market, and suddenly the practice seemed much more legitimate, bankers said.
Other companies, including office property owner Boston Properties Incand electric utility Southern Company , followed suit. More recently, companies like casino operator Caesars Entertainment Corpand wireless services provider Clearwire Corphave done at-the-market offerings as well.
This method of selling shares is still favored by smaller companies, meaning it accounts for just a fraction of overall dollar volume of issuance. The median market cap of at-the-market issuers is still fairly small - nearly $600 million last year compared with $411 million in 2010 - according to MLV & Co.
The costs for the issuer can be much lower: fees are typically around 2 percent of the money raised, compared with 4 to 5 percent for a more traditional offering. For a $100 million offering, that amounts to a savings of $2 million to $3 million.
"It's a very low cost source of equity which was compelling to us," said Jon Grisham, senior vice president and chief financial officer at Acadia Realty Trust . Acadia, a real estate investment trust that owns shopping centers, launched a $75 million at-the-market offering in January 2012 and a $125 million at-the-market deal in August.
IN THE DRIVER'S SEAT
Standard underwritten offerings have their advantages: the company usually knows that it will be able to sell the shares, and often any that aren't sold to investors will be taken up by the underwriters. But if the stock market takes a big hit just before a share sale, and the company ends up pulling its deal, it ends up with a black eye.
In other words, an underwritten deal can offer some measure of certainty to the issuer, but if the market is bad on any given day, the whole deal could end up being scotched.
In an at-the-market deal, a company typically files an initial prospectus indicating the maximum number of shares it plan to sell, but it need not issue the maximum. On any particular day, the issuer has final say over how many shares it sells.
"You can avoid the market if it's a bad day," said Andy Sanford, head of equity capital markets at Wells Fargo & Co
In a typical share offering from a company that is already public, "the investment bank usually dictates whether, when and on what terms the company can sell its securities to raise capital, but with an at-the-market offering, the company sits in the driver's seat," said Anthony Marsico, a lawyer at the firm Greenberg Traurig. "You don't see that in most other types of financings."
Banks are not always excited for their client to be in the driver's seat when it results in lower fee income. Wall Street's stock underwriting business has also been under pressure from a decline in initial public offerings.
Fees for U.S. listed IPOs, traditionally the most lucrative source of profit from stock underwriting businesses, fell 19 percent last year to $1.8 billion, the lowest level since 2009, according to Thomson Reuters data.
Still, banks feel they have little choice but to sell shares for clients through at-the-market deals.
"Many underwriters have come to realize that they need to be able to be able to offer this service to clients because managements and boards are becoming more attuned to the benefits of the product," said Michael Cippoletti, head of U.S. equity capital markets at BMO Capital Markets in New York.
Another form of issuing, known as block trading, also puts pressure on underwriter income.. These deals, where the bank buys a block of shares from an issuer in a single transaction and then sells the stock to clients, typically offer returns of around 2 percent for the bank.
To be sure, there have been some big traditional follow on stock sales in recent weeks from companies. Michael Kors Holdings Ltd , for example, raised $1.5 billion in a share offering last week. So far this year, public companies have sold $23.8 billion of shares, marking the best start to a year for secondary offerings since 2000, according to Thomson Reuters data.
But with more secondary offerings coming in the form of block trades or at-the-market deals, fee income this year is not likely to be as strong as might be otherwise expected, bankers said.
Fee pressure has spurred some banks to scale back their equity capital markets business, which does traditional stock underwriting.
Royal Bank of Scotland Group PLC , for example, said last year it would exit equity capital markets globally.
Although at-the-market offerings are traditionally used by companies that need to continually access the capital markets such as real estate investment trusts and energy companies, issuers across a range of industries including shipping and industrials are also considering the product, say bankers.
"The cat's out the bag, the genie's out of the bottle," said Todd Wyche, CEO of Brinson Patrick Securities which specializes in at-the-market transactions for clients.
(Reporting By Olivia Oran; Editing by Dan Wilchins, Martin Howell and Leslie Gevirtz)