IPOs and Capital Markets Developments in the Oil and Gas Industry - February 26, 2019 - Gibson Dunn
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
IPOs and Capital Markets Developments in the Oil and Gas Industry February 26, 2019
MCLE Information (1.0 Hour Credit) • The Handout. Participants must download the PowerPoint as the handout for this webinar to comply with MCLE requirements. Click on “File” in order to “Save As” to your computer. • Sign‐In Sheet. Participants should download the MCLE Sign‐In Sheet, complete it and email it to Jeanine McKeown. • Certificate of Attendance. Most participants should anticipate receiving their certificate of attendance in 3 to 4 weeks following the webcast. (Virginia Bar members should anticipate receiving it in ~6 weeks following the webcast.) • NY Compliance. Individuals seeking credit in New York can expect to hear the key word during the webinar. • Questions. Direct MCLE questions and forms to Jeanine McKeown at 213‐229‐7140 or jmckeown@gibsondunn.com. Gibson Dunn 2
Today’s Panelists
James Chenoweth will share insights and trends regarding tax Hillary H. Holmes will share insights and trends regarding IPOs in
matters. He is a partner in Gibson Dunn’s Houston office and the Oil and Gas Industry. She is a partner in Gibson Dunn’s
a member of the Tax, Private Equity and Energy and Houston office, Co‐Chair of the firm’s Capital Markets practice
Infrastructure practice groups. He counsels clients regarding group, and a member of the firm’s Oil and Gas, Securities
tax‐efficient structuring of partnership and corporate Regulation and Corporate Governance, and Private Equity
transactions, including transactions involving publicly traded Practice Groups. Ms. Holmes’ practice focuses on securities law
partnerships, special purpose acquisition companies and governance counseling in the oil & gas energy industry. She
(“SPACs”), IPOs and follow‐on offerings, as well as acquisitions represents private equity, public companies, private companies,
and dispositions, taxable sales and the formation of joint MLPs, investment banks and management teams in all forms of
ventures. capital markets transactions. She also advises boards of
directors, conflicts committees, and financial advisors in
complex transactions.
Doug Rayburn will share insights and trends regarding high Gerry Spedale will share insights and trends regarding special
yield offerings. He is a partner in Gibson Dunn’s Dallas office purpose acquisition companies (SPACs). He is a partner in
and a member of the Capital Markets, Energy & Gibson Dunn’s Houston office and is a member of the firm’s
Infrastructure, Merger & Acquisitions, Global Finance, Private capital markets, securities regulation and corporate
Equity and Securities Regulation & Corporate Governance governance, mergers and acquisitions, private equity, energy
practice groups. His principal areas of concentration are and infrastructure and oil and gas practice groups. Gerry’s
securities offerings, mergers and acquisitions and general practice focuses on capital markets, mergers and acquisitions,
corporate matters. He has represented issuers and joint ventures and corporate governance matters for
underwriters in over 200 public offerings and private companies and private equity clients in the energy industry,
placements, including initial public offerings, high yield including MLPs. He has extensive experience
offerings, investment grade and convertible note offerings, representing issuers and investment banks in both public and
offerings by master limited partnerships (MLPs), and offerings private debt and equity offerings, including initial public
of preferred and hybrid securities.. offerings, convertible note offerings and offerings of
preferred securities.
Special appreciation to Eric Pacifici, associate in Gibson
Dunn’s Dallas office, for his invaluable assistance with this
presentation.
Gibson Dunn 3Webcast Agenda • Part One: IPOs in the Oil and Gas Industry • Part Two: High Yield Offerings • Part Three: Acquisition by a SPAC as an Alternative to an IPO Gibson Dunn 4
Part One: IPOs in the Oil and Gas Industry
IPOs: Market Situation • Challenging environment for IPOs • Windows are briefly open • Preparations begin well in advance of IPO Gibson Dunn 6
Morgan Stanley
2019 Energy Capital Markets Outlook
• The energy equity markets have considerably improved to start the year in 2019, after a volatile and painful finish to 2018:
• WTI crude is off its $42 December lows (+22% YTD to $55 area) and the XLE, XOP (upstream), OIH (services) and
AMZ (midstream) indices stand at (+15.2% / +15.8% / +25.2% / +13.1% YTD), outperforming the broader S&P 500
index (+11.8%)
• However, partly due to a rapid collapse in energy investor sentiment during the 4th quarter and partly due to a record‐long
government shutdown affecting SEC registered offerings, there has been a dearth of energy ECM activity in 2019 with the
exception of one IPO by New Fortress Energy and a handful of secondary blocks (Enable, Dominion Energy)
• We expect the following IPO‐focused capital markets themes in 2019 for the energy sector:
The rapid decline in oil and ongoing volatility in equity performance has led to a higher “entry bar” for new public energy
companies
1
• IPO investors are demonstrating a preference for operationally and financially superior companies who are A)
producing best‐in‐class margins, B) have strong balance sheets, C) have a plan towards generating free cash flow
while D) making capital allocation decisions that will create shareholder value / strong ROICMorgan Stanley
2019 Energy Capital Markets Outlook (cont’d)
2 Public E&P investors are unequivocally more focused on FCF generation than absolute production growth – which has
cooled receptivity to many new E&P companies (especially gas companies) that are typically in a high‐growth, investment
phase. We expect upstream IPO activity to continue to be highly selective and public preferences for oilier asset base /
low leverage / FCF generation / exposure to the best basins to apply
3 Certain sub‐sectors in Oilfield Services that were previously in favor (i.e. pressure pumping and frac sand) have rotated
out of favor as a result of weakened sector fundamentals and deteriorating financial performance. Technologically
differentiated OFS product companies (characterized by low capex, lower correlation to changing upstream capital
budgets), continue to appeal to investors.
4 The Midstream sector can only be characterized as going through a tectonic shift towards “MLP 2.0,” referring to a
simplified structure without IDRs, an alignment of interest with shareholders, more responsible leverage levels, stronger
distribution coverage and funding growth with cash flow (no dependency on external equity). We expect future IPOs,
whether in a C‐Corp or MLP format, to follow this new midstream playbook investors are strongly clamoring for.
Thematic changes in the global energy trade such as the growing importance of LNG will continue to influence the types
5 of energy companies that come public. The success of the New Fortress Energy IPO, for example, played on this global
theme and the concept of bringing smaller‐scale LNG to regions in need of cheaper sources of power. We expect other
LNG producers and service companies, particularly those with a unique technology offering, to test the market in the
next 12‐18 monthsMorgan Stanley
Energy IPO Markets Largely Untested Since 1Q’18
U.S. Energy Equity Issuance Volume (1)
$Bn Energy C‐Corp Volume $Bn Energy MLP Volume
6 1,000
• The energy IPO market was QES
active to begin the year last WHD FTSI 0.1
year, however that has 4
NINE
slowed meaningfully with 500
just two energy IPOs pricing LBRT 680 4.4
2 BRY
0.4
since 1Q’18 1.0
328
2.4 NFE
1.3 218 0.2 252
• However, the energy 0 0.3 0.5
0.1 0.3
0.7 0.5
0.1 46 0.1 0.28 0.0 0
IPO backlog remains Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19
robust with several Source: Dealogic
Follow-On Energy IPO Energy Follow-On MLP IPO MLP
companies having
publicly filed their S‐1 Precedent North American Energy IPOs (1)
Price Performance (%)
Pricing Size Offer Price vs. % TSO % File / Offer / Offer /
Date Issuer ($MM) Price ($) Range Filing Range Sold Primary Sub-Industry Offer 1-Day Current
U.S. Equity Issuance 01/30/19 New Fortress Energy LLC 280.0 14.00 Below 17.00 - 19.00 12.0 100 LNG (22.2) (6.6) 0.0
Since 2015 07/25/18 Berry Petroleum Corp 182.6 14.00 Below 15.00 - 17.00 16.5 80 E&P (12.5) (5.4) (9.5)
Ex‐Energy Vol. ($Bn) Energy Vol. ($Bn) 05/01/18 PermRock Royalty Trust 106.3 17.00 Below 19.00 - 21.00 51.4 - Royalty Trust (15.0) (8.8) (46.8)
300 60
‘16 continued the wave of 02/08/18 Quintana Energy Services Inc 96.3 10.00 Below 12.00 - 15.00 29.9 100 OFS (25.9) (10.0) (49.9)
recaps, while ‘17 saw a
02/07/18 Cactus Inc 502.6 19.00 In Range 16.00 - 19.00 27.0 100 OFS 8.6 6.6 88.3
return of the IPO market
02/01/18 FTS International Inc 403.7 18.00 In Range 15.00 - 18.00 21.1 78 OFS 9.1 14.5 (39.6)
32
2 01/18/18 Nine Energy Service Inc 185.2 23.00 In Range 20.00 - 23.00 34.5 100 OFS 7.0 13.5 11.3
200 40
01/11/18 Liberty Oilfield Services LLC 248.9 17.00 Above 14.00 - 16.00 12.4 100 OFS 13.3 27.9 (0.1)
35
48
10/25/17 BP Midstream Partners LP 860.3 18.00 Below 19.00 - 21.00 45.6 100 Pipeline (10.0) (4.2) (9.0)
19
09/20/17 Oasis Midstream Partners LP 146.6 17.00 Below 19.00 - 21.00 31.4 100 Pipeline (15.0) (1.5) 14.5
0
42 08/10/17 Ranger Energy Services LLC 85.0 14.50 Below 16.00 - 18.00 39.2 100 Diversified (14.7) (1.9) (48.0)
100 193 4 20
161 05/11/17 Solaris Oilfield Infrastructure Inc 127.2 12.00 Below 15.00 - 18.00 25.1 77 OFS (27.3) (3.7) 33.7
137 144
2
23 05/03/17 Antero Midstream GP LP 875.4 23.50 In Range 22.00 - 25.00 20.0 - Pipeline 0.0 (6.4) (42.3)
18
12 04/27/17 NCS Multistage Holdings Inc 185.7 17.00 In Range 15.00 - 18.00 23.4 100 OFS 3.0 17.7 (65.4)
1
0 9 0 0 04/20/17 Select Energy Services Inc 140.1 14.00 Below 15.00 - 18.00 19.0 100 OFS (15.2) 0.1 (31.4)
‘15 ‘16 ‘17 ‘18 ‘19YTD
FO Ex-Energy ($Bn) IPO Ex- Energy ($Bn) Mean 295.0 27.2 82.3 (7.8) 2.1 (13.0)
FO Energy ($Bn) IPO Energy ($Bn) Median 185.2 25.1 100.0 (12.5) (1.9) (9.5)
Notes:
1. As of February 22, 2019Historical Energy IPO Activity
The 2017 – 2018 time period saw the highest amount of oilfield service IPOs (by $ and number) in more than a decade, including
comprising the substantial majority of 2018 IPO activity in the energy sector
# of Deals: 9 11 7 1 6 16 18 20 4 1 11 25 19 23 28 8 5 12 7 1
Volume ($bn)
E&P OFS Midstream Refining & Marketing
$14.0
$12.9
$12.2
$12.0
$9.9
$10.0
$8.4
$8.0
$7.2
$6.2 $6.1
$6.0 $5.6
$4.5 $4.4
$4.0 $3.4
$2.5
$2.0 $1.8 $1.7
$1.2 $1.1
$0.8 $1.0
$0.3 $0.3
$0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019YTD
____________________
4 Source: Dealogic and Bloomberg as of 02/22/19. Includes SEC registered IPOs greater than $20mm since 2000. Excludes BCCs/SPACs. Midstream IPOs represent MLPs and C-Corp Midstream IPOs.While Markets Continue to Rebound Strongly, The
Government Shutdown Delayed The Opening of The
2019 IPO Market
Despite the Late 2018 …And Heightened …Healthy US and Global GDP
Market Sell Off… Volatility… Growth is Still Expected
Indexed US 10 YR
120 (% Yield) VIX hit a high of 36.1 on 12/24 % GDP
Recent Market Activity
and finished up +109.7% in Q4 ’18 VIX Growth
S&P 500 climbs +18.8% since hitting recent low on 12/24/18, 3.4 40 3.8%
4.0% 3.7%
115 after heightened optimism in trade negotiations between US
and China and Fed commentary dampens market worries of 3.5%
further rate hikes 3.2 35 3.3%
110
30 2.9%
105 3.0%
3.0
+3.3% 2.5%
100
25
2.2%
2.8
95 (4.7%) 20 2.0%
2.7% 1.6%
(6.9%) 2.6
90 15
13.6
2.4
85 Hang Seng hits year low as 10 1.0%
Yuan becomes its weakest 2018 was the Fed’s most hawkish year
80 since 2008 due to economic 2.2 since 2008 with 4 rate hikes while no 5
slowdown and potential rate hikes are expected in 2019
worsened US tariffs
75 2.0 0 0.0%
Feb‐18 May‐18 Jul‐18 Sep‐18 Dec‐18 Feb‐19
Feb‐18 May‐18 Jul‐18 Sep‐18 Dec‐18 Feb‐19 US Global
S&P 500 Hang Seng Eurostoxx 50 US 10 YR VIX Index 2016 2017 2018 Expected 2019 Expected
2018 saw a 26% increase in IPO Issuance and a 41% increase in IPO Volume Relative to 2017 Year over Year
FY ’18 Activity Was Up +26% YOY 10 Most Recent IPO Pricings
Pricing Deal Value Price vs. File / Offer /
US IPO Market Update
204
Date Issuer ($mm) Range Offer Current Industry
02/14/19 Stealth BioTherapeutics 78 In Range (7.7%) (0.7%) Healthcare
152 150 02/13/19 TCR2 Therapeutics Inc 75 In Range 0.0% 6.9% Healthcare
02/13/19 Avedro Inc 70 In Range (6.7%) (8.4%) Healthcare
121 119
107 02/07/19 Gossamer Bio Inc 276 In Range 0.0% 40.6% Healthcare
94
83 02/07/19 Harpoon Therapeutics Inc 76 In Range 0.0% 19.4% Healthcare
75
02/06/19 Alector Inc 176 In Range 0.0% 18.4% Healthcare
49
01/30/19 New Fortress Energy LLC 280 Below (22.2%) 0.0% Natural Resources
12/13/18 360 Finance Inc 51 In Range (5.7%) (2.3%) Technology
7
12/11/18 Tencent Music Entertainment 1,066 In Range (7.1%) 37.0% Media & Telecom
12/06/18 Moderna Inc 604 In Range 0.0% (13.6%) Healthcare
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Volume Average (10): $275 (4.9%) 9.7%
($bn): $24.1 $38.8 $32.3 $38.0 $44.8 $56.0 $24.9 $18.4 $33.5 $47.1 $1.0
2 ____________________
Sources: Dealogic and Factset as of February 22, 2019. Includes SEC registered IPOs with a base deal value greater than or equal to $50mm. Excludes MLPs, SPACs, REITs, BDCs, and YieldCos.Equity Markets Rebound After a Rocky 2018
Powell’s Dovish Commentary on Rate Path
Macro Themes
Boosted Investor Sentiment
Equities gained for the better part of 2018 amidst risk‐on sentiment on the back of positive # of Hikes YE ’19 YE ’20 YE ’21
economic data
Fed Median 2 1 -
However, the spike in market volatility in Q4 2018 led to broader market weakness and a
Fed High 3 2 ‐
rotation out of cyclical sectors and into more defensive names
Crude rallied initially on back of OPEC announcing higher than expected production cuts 3.50%
for 2019, but failed to sustain momentum given implementation concerns and other 3.1% 3.1%
3.25%
offsetting factors such as potential diminished global demand
3.00% 2.9%
Start of 2019 impacted by government shutdown and political uncertainty (Brexit, U.S.‐China
trade), though improvements on the same and in the macro backdrop have led to a decrease 2.75%
2.4% Current Fed Fund Rate:
in volatility and positive momentum of late 2.50% 2.25 – 2.50%
Fed softened guidance, signaling “patience” on further rate hikes, with inflationary
2.25%
pressures to remain minimal
2.00%
Potential second government shutdown averted Nov-18 Aug-19 Jun-20 Apr-21
Delay in tariff deadline with China FOMC Median
Equities Sold Off From Record Highs as Volatility Surged in Q4 2018, But Have Since Rebounded in 2019
VIX S&P 500 VIX S&P 500
40 Performance Avg. September 3,000
January 2019 YTD 10.7% 18.1 High: 2,931
High: 2,873 2018 (6.2%) 16.6
2017 19.4% 11.1
30 2016 9.5% 15.8 2,800
2,775 2,775
20 2,600
14.5
14.5
10 2,400
Dec. Low:
2,351
0 2,200
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19
VIX (LHS) S&P 500 (RHS)
1
Restricted - ExternalCross Sector Price Performance and Key Drivers
Energy equity markets were challenged in Q4 2018, but showing signs of improvement in 2019
Q4 2018 Indexed Price Performance
Broad Market
After three strong quarters, equities sold off from record highs during Q4 as volatility surged in wake of a spike in interest
rates, geopolitical uncertainty and trade tensions 125%
Energy shares slumped 24% in Q4 as concerns were compounded by fears of a production supply glut and worries about Crude High
slowing demand in a weakening global economy pushed oil prices down nearly 40% over the same period on 10/3
Despite intermittent cracks in the tech rally, full rotation back into energy failed to materialize with energy representing 5.3%
of the S&P 500 at year end, near a 15‐year low
100%
Crude sell‐off caused broad de‐risking in energy in Q4, particularly in the upstream space, which underperformed the
S&P 500: -14%
broader energy market by 15%
Investors continue to focus on companies’ ability to reduce cash flow outspend, attain cash flow neutrality, generate free
AMNA: -16%
S&P 500 Energy:
E&P
cash flow and return cash to shareholders 75%
2019 capex budgets being used as a proxy for capital discipline during Q4 earnings -24%
Renewed OPEC intervention seen as underpinning a directional recovery through 2019 WTI: -38%
Share performance to be increasingly differentiated by how E&Ps strike a balance between growth, leverage and XOP: -39%
shareholder returns OSX: -46%
50%
MLP fund flows were positive in 1H 2018, but turned negative on the year in September 09/30/18 12/31/18
Following the sharp sell‐off in Q4, a partial rebound in early 2019 on the back of commodity price recovery has led to some
Midstream / MLP
recent momentum, with the AMNA up 17% YTD Indexed Price Performance 2019 YTD
Key concerns are better understood (index re‐balancing and YE tax‐loss selling have been aired out), which have contributed
to stronger performance 130%
Continued de‐risking of payouts, balance sheets, and growth outlooks expected to help attract incremental long‐only WTI: 25%
buying OSX: 19%
Consolidations / simplifications that better align incentives have helped improve sentiment and have brought added AMNA: 17%
investor attention to the sector 120% XOP: 14%
January fund flows were positive, with generalist and long‐only money beginning to flow back into the space, including via S&P 500 Energy:
the formation of new funds from non‐traditional investors (Pimco) 14%
110% S&P 500: 11%
The Oilfield Services space broadly underperformed the energy market in Q4 2018, but has outperformed YTD, +19% vs. S&P
Energy 500 +14% and the S&P 500 +11%
2019 E&P capital spend is trending up ~8% globally (similar to 2018)
OFS
100%
However, the growth mix is poised to reverse in 2019 as North America slows and International markets accelerate
North America slowing down as spending growth decelerates to ~9% (from ~18% in 2018); budgets currently being re‐
assessed given oil price volatility
Upstream investor focus on capital discipline beginning to flow through to Oilfield Services 90%
12/31/18 02/21/19
___________________________
Source: Bloomberg, FactSet, and corporate filings as of 2/21/2019.
2
Restricted - ExternalIssuance Themes and Outlook
Equity issuance was down significantly in 2018, despite an uptick in OFS issuance, as E&P and Midstream / MLP experienced 73%
and 78% declines in issuance, respectively. 2019 off to a slow start in large part due to government shutdown, but expect IPO
issuance to increase and secondary volume to be in‐line with 2018
Historical Issuance by Subsector
2017 Issuance (mm) 2018 Issuance (mm) 2019 Issuance (mm) YTD
IPO Follow-on Convertible Total % of Total IPO Follow-on Convertible Total % of Total IPO Follow-on Convertible Total % of Total
Coal $398.3 $422.8 - $821.1 3.2% - $384.3 - $384.3 3.4% - - - - -
E&P $474.0 $6,303.6 - $6,777.6 26.3% $182.6 $1,638.7 - $1,821.3 16.0% - - - - -
Midstream C-Corp $875.4 $5,094.1 - $5,969.5 23.2% - $1,656.4 - $1,656.4 14.6% $280.0 - - $280.0 100.0%
MLP $1,487.9 $4,362.0 - $5,849.9 22.7% - $967.8 - $967.8 8.5% - - - - -
Mining $570.4 $1,059.7 - $1,630.1 6.3% - - - - - - - - - -
Oil Service $1,518.6 $1,757.7 $625.0 $3,901.3 15.1% $1,436.6 $3,932.8 $250.0 $5,619.4 49.5% - - - - -
R&M - - - - - - $290.7 - $290.7 2.6% - - - - -
Royalty Trust - - - - - $106.3 - - $106.3 0.9% - - - - -
Shipping - $541.0 $280.0 $821.0 3.2% - $513.3 - $513.3 4.5% - - - - -
Total $5,324.5 $19,541.0 $905.0 $25,770.5 100.0% $1,725.4 $9,384.1 $250.0 $11,359.5 100.0% $280.0 - - $280.0 100.0%
E&P Midstream / MLP OFS
E&P issuance declined for the third year in 2018 2018 Midstream / MLP issuance limited as OFS issuance has increased as a percent of
Follow-on issuance expected to remain muted sector capital dislocation and low valuations overall natural resources equity each year since
as consolidation likely to continue to be funded drove companies to pursue simplifications and 2016, accounting for ~50% in 2018
through stock and cash, and leverage remains corporate restructuring Five IPOs came to market in Q1 2018, as they took
relatively low as operators continue to focus on Stabilization of leverage (improved balance advantage of the constructive supply / demand
capital discipline sheets and coverage profiles) and continued dynamics, raising total gross proceeds of ~$1.4 bn
Monetizations to serve as potential source of focus on “self-funding” model likely to temper Follow-ons were almost exclusively comprised
added liquidity following respective lock-ups equity issuance in the sub-sector in 2019 of monetization trades following IPOs
from M&A transactions in 2018 IPO activity picking up in 2019 with the pricing Additionally, GE’s $2.3 bn monetization of
E&P IPO backlog remains robust given the of New Fortress Energy’s $280 mm IPO in BHGE represented the largest equity
dearth of IPOs in 2018, though most continue to January transaction in the energy space last year
monitor the market closely for commodity price Largest IPO in the backlog for Rattler There are several companies in the IPO
stability and a more constructive backdrop Midstream Partners, though Midstream / backlog, though few are likely to launch in the
MLP IPO backlog remains fairly limited near-term
___________________________
Source: Bloomberg, FactSet, and corporate filings as of 2/21/2019.
Note: Includes all SEC registered offerings greater than $25mm (base deal size).
3
Restricted - ExternalIPOs: Benefits / Costs of Being Public
• Benefits
o Immediate cash to grow business or strengthen balance sheet
o Future access to cash to grow business
o Liquidity
o Equity currency for M&A
o Attract / Retain talent
o Wider Investor Base
o Prestige / Public Relations
• Costs
o Time and expense of IPO and being public
o Loss of control by current stockholders
o Liability
o Ongoing legal compliance obligations
o Effect on management decisions
o News cycle risks
Gibson Dunn 15IPOs: Overview of the IPO Process
• Process Overview Print “red herring” and Begin
Road Show
Latest date to make
public filing
15 days
General IPO Due Diligence/
Preparation Drafting Sessions
4-8 weeks 4 weeks 4-8 weeks 10 days 2 days
Organizational Meeting Confidentially Submit to Receive Initial SEC Effective Date/ Closing
the SEC Comments Pricing
Pre-Filing Period Waiting Period Post-Effective Period
• IPO Guidebook available on Gibson Dunn website
• Refer to February 2018 Gibson Dunn webcast
Gibson Dunn 16IPOs: Things You Wish You Had Known
• Proper Tax Structuring from Beginning
• Align short, medium and long‐term goals
• Exit window and strategy
• Financial Statements
o Issuer
o Joint Ventures
o Acquisitions
• SEC Climate and Developments
• Running Your Business While Executing on the IPO
• Post‐IPO Public Company Obligations Start at Pricing
Gibson Dunn 17IPOs: Preparing for an Initial Public Offering
Effects of the Government Shutdown Which Companies are Especially
• 2019 was expected to be a big year for IPOs Vulnerable During a Shutdown?
o Nasdaq received 22% higher number of IPO applications at the
Portfolio companies with limited IPO
end of 2018 than they had at the end of 2017.* windows based on external or other
o Some E&P IPOs are expected to take place in 2019; no MLP IPOs factors (e.g. oil and natural gas prices and
clinical trial results)
are expected as of the date of this presentation.
Private equity funds that need to exit their
• Expect continued disruption despite SEC reopening investments in the short term due to
o Only 285 out of 4,400 SEC employees were on the job during reaching end term of fund
the shutdown mostly in law enforcement.** Companies desperately in need of capital
o Unlike prior government shutdowns, the SEC did not have access in the short term
to emergency funding. Thus, the SEC did not review any IPO Less established companies
filings.**
o The January – February IPO window was essentially shut, *Nasdaq CEO Adena Friedman during a panel at the World
Economic Forum in Davos, Switzerland.
creating a backlog of filings going into mid‐March once
** Could the Government Shutdown Affect IPOs?,
companies finalize audited financial statements. Knowledge@Wharton Finance Blog of the Wharton School of
the University of Pennsylvania (January 2019).
Gibson Dunn 18IPOs: SEC Focus Areas and Our Recommendations
• PUDs
o PUD conversion rates
• SMOG Disclosures
o Reserve quantities as required by AC 932‐235‐50‐5
• Presentations of Reserves
o Item 1200 of Regulation S‐K
o Potential resources
o Presentation of NGLs
• Impairment
o Methods and assumptions used in impairment tests
o Commodity price environment
• Non‐GAAP Financial Measures
o Omitting reconciliation and equal prominence
Gibson Dunn 19IPOs: Efforts to Revive the IPO Market
Expansion of Confidential Review Process
• All companies may file IPO registration statements confidentially regardless of their prior year’s
revenues.
• Exchange Act registration statements, such as those used in spin‐off transactions, may be filed
confidentially as well.
• Confidential review also is available for the initial submission of draft registration statements for
most other offerings made during the first twelve months following an IPO.
Reduction in Financial Statements Burden
• Consistent with the expansion of the confidential review process, all companies may now may omit
financial information from confidentially filed draft registration statements to the extent they
reasonably believe the omitted information will not be required when the registration statement is
publicly filed.
• EGCs, however, remain the only type of issuer that can omit annual financial information from
publicly filed registration statements.
Gibson Dunn 20IPOs: Efforts to Revive the IPO Market (cont’d)
Streamlining of Disclosure Requirements
• For certain disclosure requirements the SEC:
o deleted those disclosure requirements that convey reasonably similar information to or are
encompassed by the disclosures that result from compliance with overlapping U.S. GAAP, IFRS
or SEC disclosure requirements; and
o integrated those disclosure requirements that overlapped, but required information that was
incremental to, other SEC disclosure requirements.
Expansion of Testing‐the‐Waters Investor Access?
• In 2018, the U.S. House of Representatives passed legislation to allow all companies to assess the
interest of, or “test the waters” with, certain investors before launching an offering.
• In February 2019, the SEC proposed permitting test the waters for all issuers.
Gibson Dunn 21Part Two: High Yield Offerings
High Yield Offerings: Overview
• State of the Market
o There was a 40 day period which ended with Targa Resources Partners’ HY
offering on January 10 in which there were no HY offerings.
o According to the Wall Street Journal, this was the longest period without a HY
offering of this type since 1995.
o The HY market is now on much firmer footing than at the end of 2018.
o Year to date there have been $8.6 billion of inflows into U.S. high‐yield funds.
Gibson Dunn 23High Yield Offerings: Overview (Cont'd)
• Rated below investment grade (rating is below BBB‐/Baa3)
• Senior to equity but typically junior to bank debt
• Significantly less restrictive than bank debt
• Generally not sold in issues of less than $300 million
• Typically bears interest at a fixed rate (unlike bank debt which bears interest at a
floating rate usually based on LIBOR, the rate at which banks lend to other banks in
the London inter‐bank market)
• Interest payments typically made semi‐annually (bank debt interest payments are
made at the end of each LIBOR period and at least quarterly)
• Interest may be payable in cash or in PIK notes (“payment in kind”)
• “Discount notes” accrete principal, which is essentially PIK interest
• Payment of principal on the notes is typically required to be made, in full, at final
maturity
• Term is generally longer than bank debt's (e.g., 7‐10 years versus 4‐6 years)
Gibson Dunn 24High Yield Offerings: Overview (Cont'd)
• Optional prepayment: normally subject to a “no‐call” period (5 years for 10‐year
notes, 3 to 4 years for 7‐year notes)
o Bank debt is usually optionally prepayable at any time without premium
o During the no‐call period, either prohibited from prepaying the notes or must
pay a “make‐whole” premium (i.e. present value of all remaining payments
during the no call period discounted by the treasury rate plus a small margin)
o After the no‐call period, the premium may be a set percentage of the principal
amount (half the coupon in a 10 year deal with a 5 year no‐call), where the
percentage declines over time
• Prepayment upon a Change of Control: the issuer must offer to repurchase the notes
at 101% of the principal amount
o Unlike a bank deal, a Change of Control does not trigger an Event of Default
Gibson Dunn 25High Yield Offerings: Overview (Cont'd) Covenants: Affirmative and negative covenants are designed to ensure that the issuer will stay financially healthy and will use money wisely, and that the noteholders will stay informed on the status of the issuer. • Since the directors of the issuer generally have no fiduciary duty to the debtholders, the debtholders use contractual obligations to protect their interests. • The terms will be quite issuer‐specific, since the risks of the issuer (which the noteholders will want to limit) and the needs of the issuer (for which the issuer will want to maintain flexibility) will vary. • Terms of high‐yield deals need to be more permissive than terms of bank deals because of the difficulty of obtaining consents from a widely dispersed group of high‐ yield note holders. Gibson Dunn 26
High Yield Offerings: Overview (Cont'd)
• Negative covenants restrict, among other things:
o Asset Sales
o Restricted payments (dividends to equity, payments of more junior debt and
certain investments)
o Incurrence of debt
o “Dividend blockers” (restrictions on dividends, loans and asset transfers from
subsidiaries of the issuer to the issuer)
o Transactions with affiliates
o Engaging in unrelated businesses
o Mergers and sales of all or substantially all assets
• Affirmative covenants require, among other things:
o Guarantees from new domestic subsidiaries
o Delivery of financial statements
Gibson Dunn 27High Yield Offerings: Overview (Cont'd)
• Events of Default:
o Non‐payment of principal, premium or interest
o Non‐performance of covenants
o Acceleration of other debt
o Assessment of certain judgments
o Bankruptcy
• If an event of default exists, a set minimum percentage of the holders (typically 25%)
may elect to accelerate the debt and all outstanding amounts immediately are due
• High‐yield events of default are usually more permissive than covenants in a bank
deal, including “covenant lite” deals
Gibson Dunn 28High Yield Offerings: Overview (Cont'd) • Offering memorandum, including a Description of Notes section (the “OM”) • Indenture • Notes • Purchase Agreement • Registration Rights Agreement (except in “144A for life” deals) Gibson Dunn 29
High Yield Offerings: Selected Issues
• Ability to Issue Secured Debt – the “Hookie Duke”
• The liens covenant and the debt covenant worked together to limit the amount of
secured debt
• Traditionally, liens are limited to the specified credit facility basket
• Many energy companies have a more aggressive provision which allows any “Credit
Facility” to be secured
o Allows ratio debt and refinancing debt to be secured
• During the downturns in 2014 / 2015 and 2016 issuers used these provisions to raise
secured debt and exchange unsecured debt for secured debt (“priming”)
• New issuers should expect some resistance to including this exception
Gibson Dunn 30High Yield Offerings: Selected Issues (Cont'd)
• Redemption Provisions
• The general construct of having an equity clawback, a T+50 make‐whole and a fixed
redemption based on the coupon hasn’t changed
• Two changes in the redemption mechanics:
o Shortening the notice period on a redemption
o Conditional redemption
• Recent tax reform limitations on interest expense deductibility and ability to use NOLs
Gibson Dunn 31High Yield Offerings: Selected Issues (Cont'd)
• Change of Control covenant requires the issuer to make an offer to purchase the
bonds in the event the issuer undergoes a change of control (so the bondholders
have a put right)
• Two trends in the Change of Control Covenant
o “Two‐Trigger” Change of Control – a change of control following by a ratings
decline within a certain period
More for seasoned issuers
o No Change of Control if no person owns more than 50% of the voting stock of a
resulting holding company
Viewed as pretty aggressive
Gibson Dunn 32High Yield Offerings: Selected Issues (Cont'd)
• Unrestricted Subsidiaries
o Not subject to the covenants, but limitations on counting financial results for
meeting covenants
• Customary requirements:
o Able to make an investment equal to the FMV of the subsidiary
o All contracts between the issuer/restricted subsidiaries and the unrestricted
subsidiary must be arms length
o Issuer does not have an obligation to subscribe for additional equity interests or
preserve financial condition
• If creating a Joint Venture, the JV partner typically does not want the subsidiary
subject to the covenants
o The last requirement can be problematic
Gibson Dunn 33Part Three: Acquisition by a SPAC as an Alternative to an IPO
Acquisition by a SPAC as an Alternative to an IPO
• SPAC Basics
• Recent SPAC Activity
o Upward trend in SPAC IPOs since 2009
2019 (through early Feb.): 5 SPAC IPOs; Gross Proceeds $938 million
2018: 46 SPAC IPOs (~24% of all IPOs); Gross Proceeds of $10.7 billion
2017: 34 SPAC IPOs (~20% of all IPOs); Gross Proceeds of $10.0 billion
o 6 successful energy‐focused De‐SPAC transactions in 2018
o At least 8 existing energy‐focused SPACs still searching for targets
Gibson Dunn 35Acquisition by a SPAC as an Alternative to an IPO (Cont’d)
• Considerations –SPAC Acquisitions vs. IPO
o Execution Risk
o Valuation
o Cost
o Additional Economics
o Cash Exit
o Governance
o Management
o Limited Recourse
o Timing
o Regulatory Treatment
o Tax structuring and considerations
Gibson Dunn 36Our Offices
Beijing Dubai Los Angeles Paris
Unit 1301, Tower 1 Building 5, Level 4 333 South Grand Avenue 166, rue du faubourg Saint Honoré
China Central Place Dubai International Finance Centre Los Angeles, CA 90071‐3197 75008 Paris
No. 81 Jianguo Road P.O. Box 506654 +1 213.229.7000 France
Chaoyang District Dubai, United Arab Emirates +33 (0)1 56 43 13 00
Beijing 100025, P.R.C. +971 (0)4 370 0311 Munich
+86 10 6502 8500 Hofgarten Palais San Francisco
Frankfurt Marstallstrasse 11 555 Mission Street
Brussels TaunusTurm 80539 Munich San Francisco, CA 94105‐0921
Avenue Louise 480 Taunustor 1 Germany +1 415.393.8200
1050 Brussels 60310 Frankfurt +49 89 189 33‐0
Belgium Germany São Paulo
+32 (0)2 554 70 00 +49 69 247 411 500 New York Rua Funchal, 418, 35°andar
200 Park Avenue Sao Paulo 04551‐060
Century City Hong Kong New York, NY 10166‐0193 Brazil
2029 Century Park East 32/F Gloucester Tower, The Landmark +1 212.351.4000 +55 (11)3521.7160
Los Angeles, CA 90067‐3026 15 Queen’s Road Central
+1 310.552.8500 Hong Kong Orange County Singapore
+852 2214 3700 3161 Michelson Drive One Raffles Quay
Dallas Irvine, CA 92612‐4412 Level #37‐01, North Tower
2100 McKinney Avenue Houston +1 949.451.3800 Singapore 048583
Dallas, TX 75201‐6912 811 Main Street, Suite 3000 +65.6507.3600
+1 214.698.3100 Houston, TX 77002‐6117 Palo Alto
+1 346.718.6600 1881 Page Mill Road Washington, D.C.
Denver Palo Alto, CA 94304‐1125 1050 Connecticut Avenue, N.W.
1801 California Street London +1 650.849.5300 Washington, D.C. 20036‐5306
Denver, CO 80202‐2642 Telephone House +1 202.955.8500
+1 303.298.5700 2‐4 Temple Avenue
London EC4Y 0HB
England
+44 (0) 20 7071 4000
Gibson Dunn 37You can also read
