More on Isser ElishisMore history on Isser Elishis, Forbes 2002
Toxic Stocks
Luisa Kroll, 03.04.02
They may sound like long-term investments, but equity lines are just quick hits for arbs.
Desperate to scare up cash to meet debt due in March 2003, PacifiCare Health Systems recently announced a $150 million equity line. Good news? Not to Merrill Lynch, whose downgrade caused a 20% drop in the share price over two days. (The stock has since rebounded.)
The sponsors of equity lines say they're offering life jackets to drowning companies. Tossing chum into shark-infested waters is more like it. Of the 297 companies that have received them in the last two years, 222 have seen their stocks fall within the first six months by an average of 61%, according to PlacementTracker.com.
Here's how it works. An investor commits to giving a company a certain amount of cash over 18 to 36 months in exchange for newly issued stock at a discount (typically 3% to 6%, more for very small outfits). The company often puts out a press release, touting the new access to cash, even if it never actually touches it. To get the money, the company issues a "draw down" notice to the equity-line investors. Their discount is off whatever the current stock price is--meaning they can turn a quick profit by selling the stock immediately, before taking possession of the new shares. "It's an arbitrage opportunity," says Richard Osgood, chief executive of Pacific Growth Equities. "You get the spread with no capital risk."
Investors insist they're just lenders of last resort--and backers for the long haul. That would be more credible if groups like Acqua Wellington, the grandaddy of equity-line firms that has since spawned a dozen others, took positions of over 5% in their clients. They usually don't. Acqua was created by former HSBC executives who ran a financing group in Toronto. Since 2000 Acqua has extended lines to Egghead Software (which later filed for bankruptcy) and CV Therapeutics (which lost $67 million on revenues of $6.5 million in the last four quarters). "We created the market for [equity lines]," says Isser Elishis, Acqua's chief investment officer.
Or, along with their brethren, nudged equity-issuers a little closer to the grave. Acqua makes a decent return on its investments, though it won't specify just how much. Nor will it reveal its backers. However, to reach its swank Manhattan headquarters, you take a private elevator to the top floor of the HSBC building.
Acqua backed off the business for a spell last March when the Securities & Exchange Commission issued rules requiring an equity-line issuer to be or go through a registered broker-dealer. Acqua now uses one.
How much life is left in these lines? After DMC Stratex Networks announced a $40 million equity line from Cowan Securities in July, John Nelson, who oversees small-company stocks for the State of Wisconsin Investment Board, told DMC to drop it. Says he: "In our opinion, these are toxic securities."
https://www.forbes.com/forbes/2002/0304/040a.html