REPORT OF CHARLES C. COX
OF
LEXECON INC.
I. QUALIFICATIONS
1. I am a Senior Vice President of Lexecon Inc., a consulting firm that specializes in the application of economics to a variety of legal and regulatory offerings. Among the staff and professional affiliates of Lexecon are several prominent academics (including three recipients of the Nobel Prize in economics) and a group of full-time economists, accountants, computer programmers, and research assistants.
2. I served as a Commissioner of the U.S. Securities and Exchange Commission ("SEC") from 1983 to 1989 and was Acting Chairman of the SEC in 1987. During this time, I was responsible for enforcing and interpreting the federal securities laws. I was Chief Economist of the SEC from 1982 to 1983 when I was responsible for analyzing the economic effects of proposed rules and legislation, and for evaluating established SEC policy.
3. I was a professor in the Economics Department at Ohio State University and in the College of Business at Texas A&M University before joining the SEC. My research and teaching focused on the regulation of economic activity and on the operation of financial markets. I have published numerous articles on financial markets and securities regulation.
4. I served from 1990 to 1993 as Chairman of United Shareholders Association, a nonprofit, nationwide organization that advocated shareholder rights and management accountability to shareholders.
5. I am a member of the American Economic Association.
6. I have testified as an expert financial economist in the Northern District of Illinois, the Southern District of New York, the Western District of Michigan, the District of New Jersey, the Southern District of California, the State of Minnesota (County of Mower), the Commonwealth of Pennsylvania (Berks County), an SEC Administrative Proceeding, before the NASD Market Regulation Committee, and before Congress.
II. INTRODUCTION AND SUMMARY OF CONCLUSIONS
7. The SEC rulemaking proposal commonly called the Aircraft Carrier proposes numerous fundamental changes to the regulatory framework underlying the Securities Act and the Exchange Act. SEC Release No. 33-7606 (November 3, 1998) as originally published and as amended by SEC Release No. 33-7606A (November 13, 1998), referred to together as the "Release". One of the proposed changes would eliminate the Exxon Capital line of no-action letters. 1 Under Rule 144A and the Exxon Capital line of no-action letters, issuers privately place unregistered high yield securities with Qualified Institutional Buyers ("QIBs") and agree under customary registration rights agreements to subsequently exchange such securities for identical registered securities in an Exxon Capital exchange offer. Exxon Capital exchange offers enable issuers to obtain the certainty and speed of a private placement in raising capital while avoiding the price discount that typically accompanies a restricted private offering. Put differently, Exxon Capital exchange offers provide issuers with the benefits of a private placement without the costs. If, as proposed in the Aircraft Carrier, Exxon Capital were repealed, Exxon Capital exchange offers would be eliminated. The SEC has proposed that certain "seasoned" issuers could use new registration procedures as a substitute for Exxon Capital exchange offers; however, non-public and small companies that do not qualify as "seasoned" issuers could not use these new registration procedures.
8. In proposing to repeal the Exxon Capital line of no-action letters, the SEC emphasized that the basic premise underlying the Staff's original no-action position was that the securities exchanged in reliance on Exxon Capital would remain in the institutional investor secondary market. Release 7606A, n251. According to the SEC, elimination of Exxon Capital is appropriate because non-QIBs need additional protections in offerings by unseasoned issuers. Release 7606A, p. 212.
9. Latham & Watkins, counsel for a group of leading investment banks in the high yield market, 2 asked me to analyze the economic evidence pertaining to issuers and investors in high yield securities that were issued under Rule 144A and subsequently exchanged through Exxon Capital exchange offers. I selected 102 of the 566 Rule 144A high yield offerings completed in 1997 as my sample. I reviewed the sample from a number of perspectives. First, I determined the percentage of "seasoned" issuers that would qualify for registering high yield securities on the SEC's proposed Form B. 3 Then I investigated the trading after the privately placed high yield securities were exchanged for registered securities ("post-exchange trading") to quantify the trading by QIBs, other institutions, broker-dealers, and retail investors. I have reviewed the Aircraft Carrier Release and various publicly available sources of data on the high yield securities market. In addition, I have collected non-public data from the investment banks to analyze trading in high yield securities before and after Exxon Capital exchange offers. Based on my review and analysis and on my knowledge and experience, I have reached the following principal conclusions:
In the remainder of this report I summarize the bases for these conclusions.
III. RULE 144A OFFERINGS ACCOMPANIED BY EXXON CAPITAL EXCHANGE OFFERS ARE CURRENTLY THE PREDOMINANT METHOD OF ISSUING HIGH YIELD SECURITIES
10. Since 1989-90, the high yield securities market has grown into a significant and active source of capital for U.S. businesses. Exhibit A shows that in 1990 there were only 13 new offerings of high yield securities for a total amount of $2.15 billion. By 1998, however, that market had grown to 692 offerings totaling $150.63 billion, representing an average annual growth rate of 93% in number of offerings and 103% in principal amount of financings.
11. As the market for high yield securities grew, securities offered pursuant to Rule 144A came to dominate the market. There were no Rule 144A offerings of high yield securities during 1990-91, and in 1992 there were 18 different offerings totaling $2.2 billion or less than 5% of the principal amount of high yield securities issued that year. By 1998, 583 Rule 144A offerings totaled $121.6 billion or more than 80% of the high yield securities issued. 4 See Exhibit A.
12. Virtually all Rule 144A offerings of high yield securities include registration rights in the form of a contractual provision for a future exchange of the privately placed securities for registered securities. 5 Thus, Rule 144A offerings accompanied by Exxon Capital exchange offers accounted for approximately 80% and 84% of the number of offerings of all high yield securities in 1997 and 1998, respectively.
13. For my empirical analyses, I used a sample of high yield securities offered in 1997 pursuant to Rule 144A and followed by an Exxon Capital exchange offer in which the privately placed securities were exchanged for the registered securities. I selected the sample from 1997 to provide ample time after the offering date for the Exxon Capital exchange offer to occur and for post-exchange trading to develop. Fifteen investment banks provided data on the original Rule 144A offering and post-exchange trading for my study. 6 See Exhibit B. These investment banks were ead-managers for 369 (71%) of the 517 Rule 144A high yield offerings in 1997 for which I have identified subsequent Exxon Capital exchange offers. These 369 deals accounted for 71% of the total value of Rule 144A offerings during 1997. Of the investment banks that lead-managed Rule 144A offerings in 1997, no single bank accounted for more than 10% of the number or total principal amount of 1997 Rule 144A high yield offerings.
14. I selected a stratified random sample of 102 high yield securities offerings lead-managed by the participating investment banks from a universe of 331 offerings lead-managed by these firms in 1997. 7 The sample was stratified in proportion to the participating investment banks' share of this market in 1997. 8 Exhibit B summarizes this random sample. The sample represents approximately 18% of all Rule 144A high yield securities offerings completed in 1997 and 28% of the high yield securities offerings in 1997 for which the 15 participating investment banks were lead-managers. I chose an initial sample with at least 100 offerings to ensure enough observations to adequately support statistical inferences drawn from the empirical analysis even if unforeseen data problems kept some of these transactions from being included in the final sample. From my analysis, I have found no reason to believe that the high yield securities offerings managed by the 15 investment banks that provided data differ from the offerings managed by other banks in any material respect. Consequently, I am confident that the statistics yielded by this sample accurately represent the characteristics of the universe of high yield securities offered under Rule 144A and subsequently exchanged under an Exxon Capital exchange offer.
15. I requested trading data (CUSIP, issuer, issue description, coupon, maturity, trade date, customer name, buy/sell, price, and quantity) for each of the 102 offerings from all of the participating investment banks. Because these data are proprietary and confidential for each investment bank, I agreed to keep all of the data strictly confidential. Nevertheless, four investment banks provided customer categories rather than specific customer names. 9I asked each investment bank to classify customers as QIB, other institution, broker-dealer or retail. As the data were received, I reviewed them for consistency and anomalies.
16. The final sample for the analysis of post-exchange trading consists of data for 83 of the 102-offering random sample. Of the 102 offerings for which trading data were requested, 13 offerings were eliminated because three investment banks did not provide all of their data by the analysis deadline. Another six offerings were eliminated for a variety of reasons: I found that three offerings were not actually high yield debt securities, two offerings were never registered, and one offering was not exchanged because the issuer filed for bankruptcy. To standardize the sample, I analyzed the one-year period following each offering's exchange consummation date.
IV. APPROXIMATELY 51% OF HIGH YIELD ISSUERS WHO USE EXXON CAPITAL EXCHANGE OFFERS ARE NOT "SEASONED" ISSUERS THAT QUALIFY FOR FORM B REGISTRATION UNDER THE AIRCRAFT CARRIER'S PROPOSALS
17. I investigated each of the issuers in the sample of 102 deals to see how many were "seasoned" issuers (as defined in the Aircraft Carrier). Approximately 51% of the issuers (50 of 98 issuers) were not qualified as "seasoned" issuers at the time of their Rule 144A offering. 10 See Exhibit C. In terms of value, the 53 offerings by issuers that do not qualify as "seasoned" issuers totaled $9.6 billion (47% of the sample's value), and the 49 offerings by "seasoned" issuers totaled $10.6 billion (53% of the sample's value).
18. I used a three-step methodology to determine whether or not an issuer is a "seasoned" issuer. From the Center for Research in Security Prices ("CRSP") stock trading data set, I determined all the issuers that had publicly traded securities on a U.S. national securities exchange or the Nasdaq Stock Market for at least one year prior to the earliest Rule 144A offering date. I classified all of these issuers as "seasoned" issuers. For the remaining issuers, I searched the Disclosure Inc. data set of SEC filings to determine the first date any publicly traded security was registered and compared that registration date to the Rule 144A offering date. I classified all of the issuers with a security registered more than one year before the offering date as "seasoned" issuers. Finally, I checked to see that each registered issuer had filed an annual report under the Exchange Act within one year of the Rule 144A offering date.
19. These empirical results show that approximately half of the issuers currently relying on Exxon Capital exchange offers are not "seasoned" issuers. 11 For these issuers, the alternative of registering high yield debt on Form B as suggested in the Aircraft Carrier would not be a feasible substitute.
20. After reviewing the preceding statistics, Counsel asked me to calculate additional statistics for the 517 Rule 144A issues offered in 1997 that completed Exxon Capital exchange offers. For these offerings, 233 or 52.1% of the 447 issuers were non-reporting companies at the time of their Rule 144A offering, and 185 or 79.4% of the 233 remain reporting companies as of the date of this study.
V. RETAIL INVESTORS' PURCHASES THROUGH POST-EXCHANGE TRADING ARE APPROXIMATELY 1% OF VOLUME AND 0.5% OF AMOUNT ISSUED
21. Trading data from the post-Exxon Capital exchange offer periods show that retail investors on average acquire less than 0.5% of the registered securities even though there are no restrictions on selling to retail investors at that time. Almost all of the post-exchange trading is between institutional investors. Typically, there is no post-exchange trading by retail investors, and on average retail investors account for just over 1% of the trading volume. Moreover, the total volume of post-exchange trading is less than one-third of the securities' amounts outstanding. Overall, there is minimal participation by retail investors in the high yield securities market - retail investors account for little of the trading volume and acquire only a small portion of the amounts outstanding through that trading.
22. Statistics characterizing the volume of post-exchange trading are presented in Exhibit D. 12 On average, retail investors account for 1.21% of volume. The median retail volume, however, is 0.04% -- for 42 offerings there is no retail trading at all. 13 Maximum retail trading is 26.2% of volume in one offering, the only offering above 8%, and retail trading exceeds 5% of the trading volume for only 5 offerings. In contrast, QIB trading averages 74.7% of volume and there are 13 offerings in which QIBs account for 100% of trading volume. The median QIB volume is 82.3%. Other institutional investors and broker-dealers average 8.4% and 15.7% of volume, respectively. Thus, QIBs, other institutions and broker-dealers account for approximately 99% of post-exchange trading volume. 14
23. Some of the 15.7% of volume attributed to broker-dealers could end up in accounts of retail investors. I was unable to trace this trading to the accounts of ultimate investors. If all of the broker-dealer purchases were attributed to retail investors, the percentage of volume for retail customers would be approximately 17%. However, it is unlikely that such a percentage of trading by broker-dealers would have passed through to retail accounts. This conclusion is based on my analysis of the trading data provided by the participating investment banks. For example, Merrill Lynch & Co., a participating investment bank that has a large retail component in its broker dealer operations, traces less than 0.5% of high yield securities trading to retail accounts. After discussions with investment banks participating in the study, there is no reason to believe that the retail component for other broker-dealers would differ materially from the Merrill Lynch experience.
24. Exhibit E presents statistics that summarize the volume of post-exchange trading relative to the outstanding amount of each offering. The volume of trading averages 33.1% of the outstanding offering. For three offerings, there is no post-exchange trading at all. For the other 80 offerings with post-exchange trading, the volume of trading averages 34.3% of the total offering amount. The range of volume to offering amount is 0.08% to 115%. 15
25. In light of the modest trading relative to the offering amounts, retail acquisitions average 0.47% of the amounts outstanding. The maximum percentage of any single offering acquired by retail investors is 11.2%, and retail acquisitions exceed 2% of the outstanding amounts for only four offerings. Even trading by QIBs, other institutions, and broker-dealers (which account for 99% of trading volume) effects only a modest reallocation among holders of the securities. The average trades relative to amounts outstanding for QIBs, other institutions and broker-dealers are 23.2%, 3.4%, and 6.0% percent, respectively. See Exhibit E.
26. For comparison, I computed statistics for pre-exchange trading under Rule 144A. 16 In the pre-exchange period, institutional and broker-dealer trading averages over 99.3% of volume. While the trading data indicate that the number of customers and trades increased after the Exxon Capital exchange offer, 17they also indicate that: i) there is a decrease in the trading volume as a percentage of the total amount outstanding following the Exxon Capital exchange offer (39.7% in the pre-exchange market vs. 16.5% in the post-exchange market); and ii) the retail component remains de minimus (0.19% in the pre-exchange market vs. 0.22% in the post-exchange market).
Exhibit A
High Yield Debt and Preferred Stock Offerings
1990-1998
____________________________________________________________________________________________
Rule 144A Total %
____________________________ __________________________ ___________________________
____________________________________________________________________________________________
Year # Value ($MM) # Value ($MM) # Value ($MM)
1990 0 0.00 13 2,146.94 0 0.0
1991 0.0 0.00 58 12,306.05 0 0.0
1992 18 2,228.55 269 45,596.43 6.7 4.9
1993 119 20,444.62 446 78,364.53 26.7 26.1
1994 69 8,166.75 242 42,317.34 28.5 19.3
1995 92 16,503.80 228 45,818.02 40.4 36.0
1996 217 38,486.74 384 72,623.40 56.5 53.0
1997 566 104,053.38 705 133,054.43 80.3 78.2
1998 583 121,600.90 692 150,634.31 84.2 80.7
___________________________________________________________________________________________
Source: Donaldson, Lufkin & Jenrette Securities Corporation
Exhibit B
Investment Banks Participating in Study
Number of 1997 Lead-Managed 144A High-Yield Deals Selected
____________________________________________________________________________________________
Investment Bank Total Number of Deals
Lead Managed Number of Deals Selected
_____________________ _________________________
# Value ($MM) # Value ($MM)
_____________________________________________________________________________________
1 B of A Securities LLC(1) 17 2,335.00 7 1,025.00
2 BancBoston Robertson Stephens Inc. 2 210.00 2 210.00
3 Bear, Stearns & Co. Inc. 39 7,711.03 10 2,444.00
4 CIBC Oppenheimer Corporation(2) 0 0.00 0 0.00
5 Chase Securities, Inc. 42 7,904.00 11 2030.00
6 Credit Suisse First Boston Corp(3)28 3,977.41 7 995.00
7 Donaldson, Lufkin & Jenrette 59 10,571.58 15 2,807.00
8 Goldman, Sachs & Co. 30 7,598.30 8 1,992.00
9 J.P. Morgan Securities, Inc. 17 3,327.65 4 725.00
10 Lehman Brothers Inc. 15 2,839.00 4 640.00
11 Merrill Lynch & Co. Inc.(3) 45 9,405.99 12 3,312.22
12 Morgan Stanley Dean Witter(3) 33 9,894.66 8 1,740.00
13 PaineWebber Incorporated 1 60.00 1 60.00
14 Prudential Securities Inc (3) 3 315.00 2 200.00
15 Salomon Smith Barney Inc. 38 7,381.09 11 2,002.00
________ ___________ _____ __________
369 73,530.72 102 20,182.22
_______________________________________________________________________________________
Note: Number selected is not exactly proportional due to rounding and
availability of trading data.
(1) B of A Securities LLC and NationsBanc Montgomery Securities LLC were
both participants in this study prior to Bank of America’s acquisition
of Nations Bank, NA.
(2) CIBC Oppenheimer joined late and was not included in sample selection,
but did provide trading data included in the study.
(3) Provided classifications of customer account names rather than actual
customer account names.
Exhibit C
|
Non-Seasoned Issuers |
|||||
|
Exchange |
Par Value |
% of Total |
|||
|
Offering |
Consummation |
of Offering |
Par Amount |
||
|
Issuer |
Date |
Date |
($MM) |
Offered |
|
|
1 |
Ainsworth Lumber |
07/02/97 |
11/30/97 |
232 |
1.15% |
|
2 |
Altos Hornos de Mexico |
04/29/97 |
10/15/97 |
225 |
1.11% |
|
3 |
Anchor Advanced Products |
03/26/97 |
09/23/97 |
100 |
0.50% |
|
4 |
Anker Coal Group |
09/22/97 |
03/11/98 |
125 |
0.62% |
|
5 |
Anvil Knitwear |
03/11/97 |
08/22/97 |
130 |
0.64% |
|
6 |
Argo-Tech |
09/23/97 |
01/21/98 |
140 |
0.69% |
|
7 |
Aurora Foods |
02/05/97 |
10/09/97 |
100 |
0.50% |
|
8 |
AFC Enterprises |
05/16/97 |
09/08/97 |
175 |
0.87% |
|
9 |
B&G Foods |
08/06/97 |
03/11/98 |
120 |
0.59% |
|
10 |
Citadel Broadcasting |
06/30/97 |
01/28/98 |
100 |
0.50% |
|
11 |
Comcast Cable Communications |
04/24/97 |
10/28/97 |
550 |
2.73% |
|
12 |
CEI Citicorp Holdings |
02/14/97 |
03/16/98 |
100 |
0.50% |
|
13 |
Delta Mills |
08/20/97 |
02/12/98 |
150 |
0.74% |
|
14 |
Doskocil Manufacturing |
09/11/97 |
03/27/98 |
85 |
0.42% |
|
15 |
EV International |
03/19/97 |
09/05/97 |
100 |
0.50% |
|
16 |
Fairchild Semiconductor |
03/06/97 |
08/13/97 |
300 |
1.49% |
|
17 |
FelCor Suites |
09/26/97 |
03/20/98 |
125 |
0.62% |
|
18 |
Fonda Group |
02/24/97 |
07/31/97 |
120 |
0.59% |
|
19 |
Fox Family Worldwide |
10/22/97 |
05/11/98 |
1,094 |
5.42% |
|
20 |
GeoLogistics |
10/24/97 |
05/28/98 |
110 |
0.55% |
|
21 |
Glenoit |
03/26/97 |
04/01/98 |
100 |
0.50% |
|
22 |
Globalstar |
10/23/97 |
01/15/98 |
325 |
1.61% |
|
23 |
GST Equipment Funding |
05/08/97 |
11/13/97 |
265 |
1.31% |
|
24 |
Hollywood Theaters |
07/31/97 |
03/05/98 |
110 |
0.55% |
|
25 |
Holmes Products |
11/19/97 |
05/01/98 |
105 |
0.52% |
|
26 |
Imperial Credit Capital Trust I |
06/05/97 |
06/22/98 |
70 |
0.35% |
|
27 |
Iridium |
07/11/97 |
10/07/97 |
500 |
2.48% |
|
28 |
J. Crew Group |
10/14/97 |
04/03/98 |
142 |
0.70% |
|
29 |
Leiner Health Products |
06/20/97 |
12/15/97 |
85 |
0.42% |
|
30 |
McLeodUSA |
02/27/97 |
09/08/97 |
500 |
2.48% |
|
31 |
Multicanal |
01/27/97 |
08/01/97 |
125 |
0.62% |
|
32 |
Neenah |
06/26/97 |
09/11/97 |
45 |
0.22% |
|
33 |
Netia Holdings |
10/24/97 |
06/01/98 |
394 |
1.95% |
|
34 |
PCI Chemicals Canada |
10/22/97 |
02/09/98 |
175 |
0.87% |
|
35 |
Roller Bearing Company of America |
06/18/97 |
01/22/98 |
110 |
0.55% |
|
36 |
Stanadyne Automotive |
12/04/97 |
06/05/98 |
100 |
0.50% |
|
37 |
Sunterra |
08/05/97 |
01/29/98 |
200 |
0.99% |
|
38 |
SIG Capital Trust I |
08/07/97 |
10/31/97 |
135 |
0.67% |
|
39 |
Tekni-Plex |
04/01/97 |
10/03/97 |
75 |
0.37% |
|
40 |
Telegroup |
10/20/97 |
03/04/98 |
97 |
0.48% |
|
41 |
Tjiwi Kimia Finance Mauritius |
07/29/97 |
03/18/98 |
600 |
2.97% |
|
42 |
Tom's Foods |
10/08/97 |
03/17/98 |
60 |
0.30% |
|
43 |
Trident Automotive |
12/09/97 |
06/25/98 |
75 |
0.37% |
|
44 |
TCI Satellite Entertainment |
02/14/97 |
03/30/98 |
275 |
1.36% |
|
45 |
UNICCO Service |
10/14/97 |
03/12/98 |
105 |
0.52% |
|
46 |
Wavetek |
06/06/97 |
10/29/97 |
85 |
0.42% |
|
47 |
Wilshire Financial Services Group |
08/12/97 |
03/04/98 |
100 |
0.50% |
|
48 |
Wilsons The Leather Experts |
08/14/97 |
01/09/98 |
75 |
0.37% |
|
49 |
Windy Hill Pet Food |
05/16/97 |
10/10/97 |
120 |
0.59% |
|
50 |
WinStar Equipment |
08/08/97 |
01/27/98 |
250 |
1.24% |
|
_____ |
_______ |
||||
|
9,583 |
47.48% |
||||
|
Seasoned Issuers |
|||||
|
Exchange |
Par Value |
% of Total |
|||
|
Offering |
Consummation |
of Offering |
Par Amount |
||
|
Issuer |
Date |
Date |
($MM) |
Offered |
|
|
1 |
Acme Metals |
12/16/97 |
06/19/98 |
200 |
0.99% |
|
2 |
Adelphia Communications |
02/21/97 |
09/26/97 |
350 |
1.73% |
|
3 |
Allied Holdings |
09/19/97 |
11/21/97 |
150 |
0.74% |
|
4 |
Ameristar Casinos |
07/10/97 |
12/26/97 |
100 |
0.50% |
|
5 |
Amtran |
07/17/97 |
01/09/98 |
100 |
0.50% |
|
6 |
Armco |
09/09/97 |
11/21/97 |
150 |
0.74% |
|
7 |
AEP Industries |
11/14/97 |
05/18/98 |
200 |
0.99% |
|
8 |
AES |
10/24/97 |
03/16/98 |
375 |
1.86% |
|
9 |
Belco Oil & Gas |
09/17/97 |
11/15/97 |
150 |
0.74% |
|
10 |
Borg-Warner Security |
03/19/97 |
07/24/97 |
125 |
0.62% |
|
11 |
Clark Refining & Marketing |
11/14/97 |
02/23/98 |
100 |
0.50% |
|
12 |
Cleveland Electric Illuminating/Tol |
06/11/97 |
10/27/97 |
350 |
1.73% |
|
13 |
Connecticut Light and Power |
06/19/97 |
09/30/97 |
200 |
0.99% |
|
14 |
DII Group |
09/16/97 |
01/22/98 |
150 |
0.74% |
|
15 |
Federal-Mogul |
04/17/97 |
09/20/97 |
125 |
0.62% |
|
16 |
Fleming Companies |
07/18/97 |
02/10/98 |
500 |
2.48% |
|
17 |
Greyhound Lines |
04/11/97 |
08/01/97 |
150 |
0.74% |
|
18 |
Hollywood Entertainment |
08/07/97 |
10/31/97 |
200 |
0.99% |
|
19 |
HMH Properties |
07/10/97 |
10/28/97 |
600 |
2.97% |
|
20 |
Imperial Credit Industries |
01/17/97 |
05/01/97 |
200 |
0.99% |
|
21 |
Imperial Holly |
12/17/97 |
03/12/98 |
250 |
1.24% |
|
22 |
Insilco |
08/07/97 |
11/14/97 |
150 |
0.74% |
|
23 |
Intermedia Communications |
07/03/97 |
09/29/97 |
649 |
3.22% |
|
24 |
Iron Mountain |
10/21/97 |
01/13/98 |
250 |
1.24% |
|
25 |
Jacor Comunications |
06/11/97 |
01/02/98 |
150 |
0.74% |
|
26 |
Kevco |
11/21/97 |
03/04/98 |
105 |
0.52% |
|
27 |
Lamar Advertising |
09/19/97 |
12/19/97 |
200 |
0.99% |
|
28 |
LaRoche Industries |
09/18/97 |
04/06/98 |
175 |
0.87% |
|
29 |
Marsh Supermarkets |
07/29/97 |
12/03/97 |
150 |
0.74% |
|
30 |
Metris |
11/04/97 |
03/09/98 |
100 |
0.50% |
|
31 |
Metrocall |
10/16/97 |
03/17/98 |
200 |
0.99% |
|
32 |
Nextel Communications |
09/10/97 |
01/14/98 |
840 |
4.16% |
|
33 |
NTL |
02/07/97 |
06/30/97 |
400 |
1.98% |
|
34 |
Ocean Energy |
06/26/97 |
10/02/97 |
200 |
0.99% |
|
35 |
Perkins Family Restaurants |
12/17/97 |
04/24/98 |
130 |
0.64% |
|
36 |
Pioneer Americas Acquisition |
06/11/97 |
10/29/97 |
200 |
0.99% |
|
37 |
Polymer Group |
06/30/97 |
10/03/97 |
400 |
1.98% |
|
38 |
Silgan Holdings |
06/03/97 |
09/05/97 |
300 |
1.49% |
|
39 |
Sinclair Broadcast Group |
06/25/97 |
11/07/97 |
200 |
0.99% |
|
40 |
Speedway Motorsports |
07/30/97 |
10/28/97 |
125 |
0.62% |
|
41 |
Stater Brothers |
07/21/97 |
11/17/97 |
100 |
0.50% |
|
42 |
Stone Energy |
09/16/97 |
12/10/97 |
100 |
0.50% |
|
43 |
Sun International Hotels |
03/05/97 |
05/13/97 |
200 |
0.99% |
|
44 |
Tuesday Morning |
12/15/97 |
05/11/98 |
100 |
0.50% |
|
45 |
Tultex |
04/10/97 |
09/04/97 |
75 |
0.37% |
|
46 |
Walbro |
12/11/97 |
06/30/98 |
100 |
0.50% |
|
47 |
WinStar Communications |
03/13/97 |
09/27/97 |
100 |
0.50% |
|
48 |
Worldtex |
11/20/97 |
05/22/98 |
175 |
0.87% |
|
_______ |
_______ |
||||
|
10,599 |
52.52% |
||||
Exhibit D
Percentage of Volume of Post-Exchange Trading
___________________________________________________________________________________________
Category Number
of
Offerings Mean Minimum Median Maximum
____________________________________________________________________________________________
QIB 80 74.69 0.00 82.28 100.00
Other Institution 80 8.43 0.00 1.21 98.88
Broker/Dealer 80 15.65 0.00 10.83 60.78
Retail 80 1.21 0.00 0.04 26.22
_____________________________________________________________________________________________
Notes: Percentage statistics exclude offerings with no trading. Maximum
represents the highest percentage from a single offering.
Exhibit E
Volume of Post-Exchange Trading
Relative to Amount Outstanding
_____________________________________________________________________________________________
Category Number
of
Offerings Mean Minimum Median Maximum
____________________________________________________________________________________________
QIB 83 23.20 0.00 19.97 94.11
Other Institution 83 3.39 0.00 .23 66.60
Broker/Dealer 83 6.00 0.00 1.94 48.97
Retail 83 0.47 0.00 0.00 11.20
Total 83 33.07 0.00 25.35 115.04
____________________________________________________________________________________________
Notes: Maximum represents the highest percentage from a single offering.
Notes: Maximum represents the highest percentage from a single offering.
-[1]- . Exxon Capital Holdings Corp., SEC No-Action Letter, 1988 SEC No-Act. Lexis 682 (May 13, 1988). The Exxon Capital no-action letter allows the exchange of certain privately issued securities for identical registered securities.
-[2]- . B of A Securities LLC, BancBoston Robertson Stephens Inc., Bear, Stearns & Co. Inc., CIBC Oppenheimer Corporation, Chase Securities Inc., Credit Suisse First Boston Corporation, Donaldson, Lufkin & Jenrette Securities Corporation, Goldman, Sachs & Co., J.P. Morgan Securities, Inc., Lehman Brothers Inc., Merrill Lynch & Co. Inc., Morgan Stanley & Co. Incorporated, PaineWebber Incorporated, Prudential Securities Incorporated, and Salomon Smith Barney Inc.
-[3]- . Under the SEC's proposal, issuers that have a one-year reporting history and have filed an annual report under the Exchange Act would be "seasoned" issuers that could use Form B. Form B would allow those issuers to "file and go" without SEC review under certain circumstances.
-[4]-. The SEC states that companies raised approximately $254 billion through 144A offerings in 1997. See Release 4606A at 51, n102. The $254 billion is a preliminary figure, compiled by Securities Data Co. (SDC) and published January 2, 1998 in the Wall Street Journal, that includes stock as well as high yield securities. The final number as released by SDC on February 25, 1998 is $260.6 billion.
-[5]- . My understanding that virtually all Rule 144A high yield securities offerings include an Exxon Capital exchange offer component is based on discussions with personnel at the various investment banks that provided data for this study. In addition, I confirmed that 517 or 91% of the 566 offerings of Rule 144A high yield securities in 1997 consummated an Exxon Capital exchange offer.
-[6]- Although 16 investment banks agreed to participate in the study, two of the investment banks, B of A Securities LLC and NationsBanc Montgomery Securities LLC, merged before the data were collected. Consequently, 15 investment banks provided the data.
-[7]- I excluded 38 of the 369 Exxon Capital exchange offers before selecting the sample because 20 did not have a full year of post-exchange trading prior to July 1, 1999 and 18 had other complications such as the security being issued as part of a unit.
-[8]- If one investment bank was lead-manager for 15% of all offerings in 1997, then 15% of the sample was selected from deals lead-managed by that investment bank in that year. If another investment bank was lead-manager for 2% of all 1997 offerings, then 2% of the sample was selected from that investment bank. Due to rounding and the fact that offerings are whole numbers, the percentages selected are approximates.
-[9]-. Four investment banks provided classifications of each of their trades within categories such as QIB, other institution, broker-dealer.
-[10]- The sample contains 102 offerings, but four of the 102 issuers each have two offerings of high yield debt that are in the sample. Hence, there are 98 different issuers in the sample.
-[11]- The point estimate is 51%. For the 369 Exxon Capital exchange offers, a 95% confidence interval is 47-55%. That is, at the 95% confidence level, the true percentage of issuers failing to qualify as seasoned issuers is between 47% and 55%.
-[12]- . The trading data analyzed in this report are purchases by customers from the participating investment banks. Consequently, "trading volume" refers to the volume of purchases.
-[13]- For three offerings, there is no post-exchange trading at all. For 39 offerings, there is no post-exchange trading by retail investors, but there is trading by other classes of investors. The trading statistics presented in ¶ 22 and Exhibit D are based on the 80 offerings in which there is trading.
-[14]- One investment bank classified trades only as retail or institutional. I checked to see how this classification affects the empirical results and found that they are not significantly different. The percentage of trading by QIBs increases to approximately 81% and trading by other institutions decreases to approximately 3%.
-[15]- It is possible that there is trading in the sample offerings that is not captured by my empirical analysis because there could be some trading through investment banks that did not participate in this study. Therefore, the total trading relative to the amount outstanding could be larger than reported here. Although it is appropriate to consider this qualification in interpreting the empirical results, it is, in my opinion, unlikely to be a significant problem. First, the lead-manager for each offering is included in the sample and the lead-managers' records generally contain most of the trading data. Second, post-exchange purchases by retail investors are so small that even doubling the retail purchases would not change my conclusion that retail purchases are negligible. Third, the provision of data by 15 of the leading investment banks should accurately reflect the universe of market participants trading in high yield securities.
-[16]- The trading periods analyzed for this comparison are equal numbers of days before and after the Exxon Capital exchange offers.
-[17]-. The number of customers more than doubled, while the number of trades increased by approximately one-third.