You and I stop by an ATM to pick up a little cash. An increasing number of Canada’s largest companies are starting to hit their own version of an ATM to find the money for their biggest projects.
In Bay Street circles, an ATM is an at-the-market equity program. It’s an approach to raising money that sees companies sell their stock into the market on an almost daily basis, rather than funding growth by periodically doing large equity offerings. To date, at least eight domestic companies in capital-hungry sectors such as utilities, cannabis and mining have announced ATM programs, picking up on a financing trend that is now commonplace in the United States. The corporate-finance crowd is now engaged in an active debate on the merits of selling stock through an ATM.
Pipeline operator TC Energy Corp. – that’s TransCanada Corp., for those who missed the name change – is a leading proponent. The Calgary-based utility pulled more than $1-billion from its ATM, and increased the size of the program to $2-billion. Aurora Cannabis Inc. can tap an ATM for up to $514-million, capital that will pay for anything from new greenhouses to acquisitions. In July, Franco-Nevada Corp. unveiled plans to raise up to $200-million through an ATM, cash it will use to fund mining projects.
The case for ATMs is simple. It is a low-cost, flexible way to raise money. The investment banks that run the programs charge a 1-per-cent to 2-per-cent fee, half the 4-per-cent commission charged on a traditional equity sale. And companies sell stock at the market price, rather than accepting a discount to where their stock is trading in order to move a large amount of equity in one underwriting.
The argument against an ATM program is slightly more academic. Some executives and bankers see a program that constantly drips out stocks weighing heavy on their share price. A chief financial officer who thinks Job 1 is maximizing the share price – a worthy goal – may be reluctant to embrace an ATM that overhangs the market every day.
After listening to both sides of this debate, Algonquin Power & Utilities Corp. chief financial officer David Bronicheski launched a multiyear US$250-million ATM program in February. “We are one of North America’s fastest growing utilities,” Mr. Bronicheski said in an interview, and he estimates the company will invest $1-billion to $1.5-billion annually for the next five years. He said the company needs reliable access to both equity and debt markets and “the ATM is one more tool in our tool box.”
Algonquin takes a number of steps to ensure its ATM program doesn’t depress the company’s stock price. The utility only sells equity on days when its share price is rising, and caps sales at 10 per cent of daily trading volume on the Toronto and New York stock exchanges. Mr. Bronicheski said investment bank research shows an ATM can account for up to 25 per cent of daily trading before it starts to weigh on the share price, but Algonquin opted for a conservative approach.
Algonquin says it would consider the program a success if it raises $50-million to $80-million a year and Mr. Bronicheski said: “We never expect that ATM will be major source of our financing.” Algonquin’s program is run by five dealers: RBC Dominion Securities Inc., J.P. Morgan Securities Canada Inc., Merrill Lynch Canada Inc., Scotia Capital Inc. and TD Securities Inc.
There are also ATM programs in place at Emera Inc., Fortis Inc. and Endeavour Silver Corp. All of these companies have a relatively constant need for capital, and significant daily trading in their stocks, which make them ideal candidates for this approach to financing. The same is true of Canadian companies in sectors such as financial services and real estate, areas that investment banks see as the next frontier for ATMs.
The bought deal isn’t going away, but investors can expect to see a lot more companies tapping Bay Street’s version of the ATM.
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