The Equity Line as a formula for financing listed companies

Nowadays, many companies need financing to realise their projects or to accelerate their growth and, to do so, they turn to alternative financing, which is a departure from traditional bank financing, under which companies incur debt to banks that provide the necessary funds to meet such business challenges. In this article, we look at the Equity Line for financing listed companies.

Characteristics of the Equity Line

In this article, we briefly analyse the equity line, an alternative form of financing other than bank financing, which is not considered debt and does not affect the CIRBE, available to companies listed on secondary markets, such as BME Growth and BME Scale in Spain or Euronext in Europe.

To summarise, an equity line consists of an agreement between a listed company and another financing entity (generally a private equity fund) whereby the latter makes available to the former an agreed amount of financing, which may be called up in full, in part or in tranches at the request of the listed company, in exchange for shares which the latter will deliver to the financing entity in the framework of a cash capital increase to be agreed in the listed company.

This capital increase shall be carried out taking into account the amounts and the term agreed between the listed company and the financing entity, and shall exclude the shareholders’ pre-emptive subscription rights.

The share price for the capital increase shall be obtained by taking into account the market price of the listed company’s shares during a given period, applying a discount of between 5 and 10 per cent, unless otherwise agreed between the parties.

This way of obtaining financing has some similarity to the operation of a line of credit. In a line of credit, the bank agrees to provide a certain amount to a company, which is obliged to repay it under agreed conditions and interest.

However, the credit line differs from an equity line, inter alia, in that the amounts provided by the financing entity in the latter case operate and are recorded as equity of the financed company, and not as debt.

It should be noted that, immediately after acquiring the shares of the listed company following the implementation of the aforementioned capital increase, the financing institution will go to the market and sell them at the discounted price in order to obtain, where possible, a corresponding profit.

What clauses are common in Equity Line agreements?

The most common clauses in this type of contract are the following:

1. Amount and duration of the agreement. The amount of financing will depend on the needs of the listed company, but also on the liquidity of its shares in the market. In terms of duration, these agreements are usually agreed for periods of between one and three years.
   
   
2. Obligations between the parties. This clause regulates the obligations assumed by both parties: 2.1. On the part of the financing entity, obligations are assumed such as subscribing the shares and disbursing the funds required by the listed company. If, alternatively, the contribution is made after previously obtaining a loan of the shares of the listed company (which corresponds to another of the modalities of execution of the capital line), it also includes the obligation to sell these shares under the agreed conditions. 2.2. On the part of the listed company, this includes obligations such as carrying out the capital increase excluding pre-emptive acquisition rights; carrying out all the necessary formalities and notifications to the CNMV; and paying the agreed fees and expenses.
   
   
3. Cancellation clause. It is common to agree on a cancellation clause that allows for the termination of the issue of the new shares in the event of force majeure or extraordinary changes in market conditions.
   
   
4. Fees and expenses. This clause regulates the commission to be received by the funding body and establishes the system for allocating the costs associated with the agreement.

Do you need advice? Consult our experts and access our area related to alternative financing methods:

Incorporation to Capital Markets and Alternative Financing