Companies have begun taking advantage of new Canadian rules that make it easier to raise capital by selling stock directly into the market, heralding the growth of a popular low-cost financing tool in Canada.
The Canadian Securities Administrators (CSA) officially changed the rules for at-the-market equity offerings, known as ATMs, on Aug. 31, removing limits tied to market capitalization and daily trading volume, and eliminating the need to seek advance permission from regulators. Canada’s regulation of ATMs – which allow public companies to sell shares into the market on a continuing basis at prevailing prices rather than issuing a large block of stock at once at a fixed price – now align more closely with U.S. rules.
ATMs have exploded in popularity in recent years as a way to raise equity capital without needing the support of institutional investors. Until the CSA rule change, however, Canadian companies mostly conducted ATM programs in the United States, where issuers faced fewer regulatory restrictions. Now, corporate lawyers and investment bankers are seeing a surge in interest for cross-border or Canada-only ATMs.
Vancouver-based hydrogen fuel-cell maker Ballard Power Systems Inc., which is listed on the Toronto Stock Exchange and the Nasdaq Stock Market, launched a cross-border ATM worth US$250-million the first day after the rule change.
“Obviously we waited until Sept. 1 to take advantage of the changes in the rules in Canada,” said Tony Guglielmin, Ballard’s chief financial officer.
Ballard did its first ATM earlier this year, raising US$75-million through a U.S.-only offering it launched in March. While about 75 per cent of Ballard’s shares trade on the Nasdaq, Mr. Guglielmin said tapping into the additional 25 per cent on the TSX was an advantage in its second, larger ATM this month.
A major draw of such programs is the lower cost. Bankers earn about 2-per-cent commission on ATM sales. That compares with a typical fee of 5 per cent to 7 per cent for bought deals, where investment banks buy a block of shares from a company and sell it on to investors.
ATMs are also a particularly valuable tool for companies with highly liquid stocks but little backing from institutional investors. The success of the deal depends on general market demand, often driven by retail investors, and not demand from specific institutional funds looking to build up their position in a company. This can be a boon for companies in more speculative sectors, such as mining, cannabis or biotech.
For Ballard, the ATM is part of a broader capital-raising strategy, which is also aimed at increasing the company’s institutional investor base, Mr. Guglielmin said. Ballard filed what is known as a base shelf prospectus in June, enabling it to raise up to US$750-million over 25 months; the ATM program is part of that larger fundraising process.
“Any investment bank would tell its corporate clients don’t get seduced only by ATMs," Mr. Guglielmin said. "They’re very cost-effective but just one tool to raise equity.”
Until recently, ATMs were viewed with skepticism, regarded as a financing tool of last resort for lower-quality issuers. The concern has always been that selling stock into the market at prevailing prices will drive down the price, thereby diluting existing shareholders.
That view has evolved in recent years, said Richard Eakins, managing director of Equity Capital Markets at Raymond James Ltd., which is co-lead on the Ballard deal.
“I would say, three years ago, if you put out you were going to do an ATM, there might be investor pushback saying, ‘You’re just constantly diluting me,’ ” Mr. Eakins said.
Since then, a number of well-established companies have turned to ATMs as part of continuing capital management. Fortis Inc., for example, launched a $500-million ATM program in 2018, followed by Algonquin Power & Utilities Corp. with a $250-million program in 2019 and a $500-million program this year. Franco-Nevada Corp. and Wheaton Precious Metals Corp. both came to market with $300-million ATMs earlier this year.
At the same time, there are still situations in which ATMs are looked on unfavourably, Mr. Eakins said. “Where I think you would still get pushback is when you have a small-cap illiquid company, with an ATM out there, without necessarily an identified use of proceeds.”
Michael Urbani, a partner in law firm Stikeman Elliott’s corporate and securities practice in Vancouver who worked on the Ballard Power ATM, calls the Canadian rule changes “a boon for Canadian issuers."
“We really think it’s going to be utilized in Canada to a much greater extent than in the past. Hopefully we’ll see it rival, or come close to, the utilization of these programs in the U.S.,” he said, noting small-cap companies could use the option as well.
He pointed to a $20-million ATM launched Sept. 4 by Metalla Royalty & Streaming Ltd., a precious metals royalty company based in Vancouver.
Denis Silva, a corporate finance law partner at DLA Piper in Vancouver, advised Metalla on the offering and says the new rules were not the driving factor in the timing, but did help.
“I think it was good policy move by the regulators in Canada to harmonize with the U.S. The markets are so connected and it removed some of the regulatory burden.”
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Mark Rendell