Wednesday, December 12, 2007

Private Investments in Public Equity

Private Investments in Public Equity, known to underwriters and investors as "PIPE's", have been the ugly stepchild of the capital markets. PIPE's have been generally considered to be last ditch capital raising tools for cash starved companies. Generally, common stock owners reviled PIPEs with their dilution and high coupon. (PIPE's are normally executed with preferred stock. Further, the preferred almost always had a conversion feature).

It is a powerful comment on the state of some financial institutions that they would do PIPE transactions. Oh, they may not call them PIPEs and may even fight that label, but PIPEs they are. Citibank's new capital carries a whopping 11% coupon. And recall that dividends aren't tax deductible, so the after tax cost equals the pretax at 11%. My conclusion would be that they are in far worse shape than believed to accept that deal. UBS is in at a still rich 9%. WAMU - or Washington Mutual, just took a shot of high priced financial inoculation.

Desperate times call for desperate measures of course; my interpretation of these tea leaves is that times must be desperate indeed to pay these rates.

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