ASX-listed small cap companies are flocking to the ATM for a ready source of cash, at a time and amount of their choosing.
In this case, ATM does not refer to the ubiquitous automated teller machines but At-the-Market, a fundraising mechanism to enable companies to issue shares and raise capital (typically in smaller tranches).
Long popular in the US, ATM financing is also cheaper and more flexible than a fixed fund raising such as a placement. But they are intended as an ancillary ‘top up’ measure, rather than a primary source of funding.
“In the biotech world, ATM facilities have become so popular that it’s almost unheard of for companies not to put one in place,” says US corporate adviser Gilmartingroup.
“ATM financing used to get a bad rap, but over the past decade it has come to be seen as a logical and necessary part of a biotech’s financial arsenal.”
In short, the ATM process involves the company arranging to sell a maximum number of new shares via a broker, at the prevailing market price rather than a discount.
The securities are usually fed into the market over a period of time, giving the issuer control over the timing and the number of shares offered. The company is never obliged to issue the shares if the pricing is unsatisfactory on a given day.
According to research house PlacementTracker, $US100 billion of funding was arranged across 1275 ATM transactions in the US in calendar 2021.
The mechanism has been used in the US since the 1990s, including by corporate titans such as Citigroup, Bank of America, American Airlines and Tesla. The latter raised $US10 billion via ATMs in late 2020.
In February, the ASX and Nasdaq-listed eye diseases house Opthea established an ATM program with US broker Jefferies, by which it would offer and sell up to $US75 million of its ordinary shares by way of American Depositary Shares.
Also dual listed, local brain cancer drug developer Kazia Therapeutics followed suit in April, arranging a maximum $US35 million facility with Oppenheimer & Co.
Local intermediary Acuity Capital says it has facilitated more than 60 ATM facilities, which provided $130 million of capital and $650m of standby capital.
ATM adopters include Lake Resources (maximum facility $250 million), Sayona Mining ($50m), Recce Pharmaceuticals ($20m) and Lithium Australia ($25m).
Recce chief executive James Graham describes ATMs as the “smartest and most innovative” capital raising mechanism available, as they provide flexibility to the company while also benefiting shareholders.
Kazia CEO James Garner says an ATM is effective in cases where an investor such as a family office seeks to buy, say, $250,000 of shares (an amount not worth organising a placement for).
“A normal capital raising is a manual, bespoke and cumbersome process, especially in the US where an enormous amount of documentation is required,” he says.
“ATMs use the machinery of the stock market to execute the transaction, rather than a big capital raise.”
A developer of synthetic antibiotics to tackle ‘superbugs’, Recce took out a $20 million ATM facility via a local intermediary, in 2018.
Graham says when a share price runs, companies and their brokers typically devise a capital raising based on a steep discount to the volume-weighted average price.
“They gut the share price and hope that investors turn up, by which time the event has passed,” he says.
Dr Garner concurs that ATMs are most useful for “liquidity events” such as the results of a key clinical trial. Such announcements can double a share price (or more) and result in huge turnover.
For a typically cash strapped biotech, it takes too long to capitalise on the share price strength with a conventional raising.
“We have had a few of those events with Kazia over the years,” he says. “If you have an ATM, you can sell stock into the momentum and use it as an opportunity to raise some money.”
A fishing enthusiast, Recce’s Graham says the company has its line and bait in the water, but in not obliged to reel in the funding.
“I can pick the fish when I want them,” he says.
“ATMs are beautiful in nature because it gives shareholders the ability to participate in the upside ‘time and place’ opportunity.
“It’s not to pump the brakes when the share price is screaming , it is about taking a little bit off the table when the market is able to do it.”
Dr Garner adds that the fees are much lower – typically 3 per cent of amounts raised rather than 6-8 per cent for a normal raising. There’s also no discount and no pressure to sweeten the offer with accompanying options or warrants.
“It’s just about the cheapest money any company will ever raise,’ he says.
In the US, ATMs have also been favoured because any amounts raised only need to be disclosed in the quarterly disclosures (10-Q statements). ASX rules require each and every draw down to be disclosed, resulting in a screed of immaterial disclosures.
Experience to date shows that the actual amounts raised tend to be far less than the headline – and somewhat arbitrary – maximum figure.
For instance, Recce so far has drawn down only $150,000 of its $20 million facility. With $15 million of cash in the bank, the company does not need the money but the funding could come in handy when its projects move from preclinical to clinical stage.
Lithium Australia and Blackstone Minerals have drawn down $12.3 million and $11.2m respectively – just under half of the maximum amounts.
While Recce’s Graham dubs ATMs as ‘beautiful’, they are not perfect.
“One negative aspect of ATMs is the timing and quantum of proceeds are unpredictable, whereas you know exactly how much you will get in a conventional raise,” Kazia’s Dr Garner says.
He adds some ATM platforms are highly automated, which means supply and demand is met without due regard to the ‘feel’ of the market.
“One reason we chose Oppenheimer is that the firm has a human trading desk, so there’s a nuance and art to it.”