I noticed that FJET (Fastjet) has recently been involved in EFFs, or “Equity Finance Facilities”. What are they, and what do they imply?
The basic gist seems to be, from what I can gather, is that a company C is in need of finance. Suppose an fund F exists to provide an EFF. Instead of a placing shares, C will arrange a facility with F, up to a certain value. C may then “draw down” on that facility as it needs it, until the facility is exhausted. It issues shares to F, who then pay a calculated price. The price seems to relate to the share price in force at the time of the drawdown. I’m not clear on how F makes its money, as it seems to take the shares at a slight premium to the market. Coupled with the fact that the share issue is dilutive, I’m puzzled as why F grants the facility. There’s obviously some wrinkle I’m missing here. Anyone care to fill me in?
The touted benefits of the scheme to C is that it can utilise the facilities as needed, and doesn’t need to pay for anything that it doesn’t need. Sounds fantastic, right? The trouble is, I’ve Googled around for companies that have used EFFs, and they appear to have been HIGHLY TOXIC to the share price over the long term.
What follows is not a hand-picked selection of shares carefully chosen to prove whatever it is I wanted to prove, but a set of companies that I have taken as I have seen them.
NASDAQ:MVIS – MicroVision
On 13 Sep 2011, MVIS secured a $35m committed equity financing facility from Azimuth opportunity (http://is.gd/YETGRs). The news seemed to have caused a minor spike in the share price, as presumably investors were excited about the facility. On 16 Sep 2011. the share price was $7.679. It is now $2.37. Ouch!
Continuing on …
NASDAQ:DSCO – Discovery Labs
On 14 Jun 2010, DSCO secures new committed equity financing facility with Kingsbridge Capital for up to $35m (is $35m some kind of magic facility figure here??). In this case, that actually sent the share price down, and on 18 Jun 2010, the share price stood at $3.66. It is now $1.69. Are we spotting a pattern yet?
OTCBB:OCTI.OB – Octus
On 7 Dec 2009, Octus secures $5m reserve equity financing funding with AGS Capital (http://is.gd/Y590iC). Share price on 18 Dec 2009: 0.175. Share price now: 0.0111.
LON:SER – Sefton Resources
Closer to home this time, on 14 May 2012, SER announced a £2m oversubscribed placing, and £10m equity financing facility
(http://is.gd/qA95Gm). Share price on 18 may 2012: 1.75p. Share price now: 0.514p
I HAVE FOUND NO INSTANCES OF COMPANIES WHERE SHAREHOLDERS HAVE ACTUALLY BENEFITTED FROM EFFs – THEY’VE ALL LOST. Admittedly, I’ve only done a casual search, but there’s a clear message here. If anyone can fill in some of the substance on EFFs, and highlight their particular dangers, or know of any EFF which has been ultimately beneficial to the shareholders, then let me know.
I’m afraid that this looks really bad for FJET.
Edit: Thanks to MrContrarian and his blog “Cheapskate”, for his post on “Equity death spirals – aka Standby Equity Distribution Agreement (SEDA)”. Also, please read the comments section, which explains the mechanics of the EFF.