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Kestrel flies high

Most innovative convertible Issuer: Kestrel Amount: $125 million Bookrunner: Morgan Stanley Dean Witter

Morgan Stanley's convertible bond deal for Kestrel Solutions was the first outing for an innovation the firm has dubbed a "going-public convertible debt offering". It offers an effective solution to two problems: first, it satisfies a demand from investors who want to participate in a firm's potentially significant upside following an IPO but who cannot invest in IPOs or in companies which are private, or both. And second, it provides a cheaper source of funding for a company than a last round of mezzanine or venture capital.

"We noticed that there was a group of companies who had the potential to register gains of 200% or 300% in the first weeks after an IPO, and keep those gains, yet who still had to give up to 100% appreciation to those investing in their last round of pre-IPO funding," says Brooks Harris, head of convertible origination at Morgan Stanley Dean Witter. "And also there was a class of investor whose charters would not allow them to invest in pre-IPO companies who might have to wait until up to two years after the IPO before getting an opportunity to invest."

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