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."
The terms of the deal keep all the elements necessary for a successful IPO in place.