Money Stuff

Lordstown Is Selling Some Stock

Also analyst lifestyle, Credit Suisse, merger regulation and Elon Musk’s schedule.

By Matt Levine
27 de julio de 2021 10:59 GMT-5

Weird at-the-market offering

Hmm. Hmm. Hmm:

Lordstown Motors Corp., the electric-vehicle startup struggling to find cash to move into production,
reached a deal to sell as much as $400 million in stock over the next three years to an investment fund
managed by Yorkville Advisors Global.

The terms allow the Ohio-based truckmaker to direct the fund to buy a tranche of Class A shares equal
to as much as 30% of a day’s trading value of the stock or a block of $30 million, the EV maker said in a
regulatory filing Monday. When those sales take place, the buyer benefits from a 3% discount off the
stock’s three-day average market price.

Hmm. The headline here is “Lordstown May Raise Up to $400 Million From Investment Fund,” but it seems
clear that the Yorkville fund is in the moving business, not the storage business. This trade is not “Yorkville
will buy stock from Lordstown anytime Lordstown asks, in any amount that Lordstown suggests, at
whatever the current price is, because it is a committed long-term investor and doesn’t care about price or
size.” This trade is “Lordstown can call up Yorkville anytime and say ‘sell some stock for us,’ and Yorkville
will do that and get paid a 3% fee.”

Specifically, the mechanics are

1
:

1. Anytime it wants, Lordstown can call up Yorkville and say “we want $X.” X is capped at 30% of the
value of Lordstown stock that traded on the previous day, or $30 million, whichever is less.

2. Yorkville says “okay we’ll give you $X in three days.”

3. Yorkville spends the next three days selling $X worth of Lordstown stock, on the stock exchange, to
whoever wants to buy it. (Presumably that means Lordstown’s retail shareholders.) Yorkville is selling
those shares short; it doesn’t have them yet. Actually technically it is selling $X/0.97 worth of stock: It
sells a bit more stock than it needs to pay Lordstown the $X that it requested. 

4. After the third day, Yorkville gives Lordstown the money that it asked for (the money that it got selling
the stock short), and Lordstown gives Yorkville the stock that it sold (which it uses to close out the
shorts). Yorkville is flat: It sold stock short for money, delivered the money to Lordstown, and got back
 the stock to close out its short. Or, that is, almost flat: Because Yorkville sells more than enough stock to
pay Lordstown, and because Lordstown gives it all of that stock, it has a bit of extra cash, which it keeps
in the form of a 3% fee.

Technically Yorkville doesn’t buy stock from Lordstown at the price it sold at, but rather at the average of
the daily volume-weighted average stock prices over those three days, but if you are a professional investor
it is not particularly hard to sell stock at pretty close to the volume-weighted average price. So if Lordstown
asks Yorkville for $6 million, Yorkville will put in an order to sell $2.06 million of stock per day at the VWAP
for each of the three days; at the end of that time it will have sold $6.18 million of stock, will give Lordstown

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the $6 million, and will make $180,000 for its trouble. Yorkville also gets 371,287 shares upfront — worth
$2.7 million at yesterday’s close — as a commitment fee (in addition to the 3% it makes on any actual draw).

To be clear, this is not a requirement of the contract; if Yorkville wants to keep the stock, it can. In practice
though the plan is clearly for Yorkville to sell. Lordstown’s filing says that Yorkville has agreed not to
“engage in any short sales or hedging transactions,” except that “upon receipt of an Advance Notice, YA
may sell shares that it is obligated to purchase under such Advance Notice prior to taking possession of
such shares”: That is, they specifically expect Yorkville to short the stock each time Lordstown asks for
money.

Also Lordstown is not allowed to sell Yorkville any shares unless Yorkville can resell those shares freely
under a registration statement. Also it’s not allowed to sell Yorkville any shares if the sale would put
Yorkville above 4.99% ownership of Lordstown. That’s only about 8.8 million shares, worth about $64
million at yesterday’s close. That is not a problem, though, because Yorkville clearly plans to sell all the
shares before buying them, so it will never own much of Lordstown.

This trade is sometimes called an “equity line of credit,” and it is not all that uncommon. Bloomberg News
notes:
 The mechanism, akin to an equity-line-of-credit, is not unique to Lordstown among companies trying to
build alternative-powered vehicles. On June 21, Nikola Corp. reached a similar deal to sell up to $300
million worth of stock to Tumim Capital, it said in regulatory filing. Nikola paid Tumim about $2.65
million of shares upfront as a sweetener. In return, Nikola holds the right to demand Tumim buy its
shares at a time of its chosing and at market price minus 3%, but can’t demand the full $300 million in
one go.

The “line of credit” name reflects the mechanism of the contract — the company asks for advances, the
investor gives it money, etc. — but is a little misleading in that there is no guarantee of money. There are
caps on how much stock the company can sell (no more than 30% of a day’s volume, no more than 4.99%
at a time, no more than 19.9% of the company’s total stock); if the stock price declines those caps are worth
less money. 

One way for public companies to raise money is by doing an underwritten stock offering to institutional
investors. You hire some investment banks, they call up investors, they build a book of demand, they
present you with a deal, you sell $400 million of stock to a bunch of institutional investors at a fixed price,
probably a smallish discount to the last closing price. This is sort of the historical normal way to do an
equity offering. The advantage of it is that it can be done quickly and raise a lot of money.

Another way for public companies to raise money is by doing an “at the market” offering (sometimes
abbreviated “ATM”). You hire some investment banks, they sell stock for you on the stock exchange over a
period of hours or days or even weeks, you sell $400 million of stock at varying prices depending on what
happens in the market over that period, and you pay the banks a fee (say 2.5%) for their service. This has
historically been a bit less popular than the underwritten offering, because it takes longer and has more
risk.

But it has one huge advantage: Whereas an underwritten offering is normally sold to a smallish group of
institutional investors who have relationships with the underwriting banks, an at-the-market offering is sold
to absolutely anyone who wants to buy, anonymously, on the stock exchange. What this means, in
particular, is that it is sold to retail investors. And so if you are sort of a meme-y company, and you want to
raise money specifically from your enthusiastic retail investors, at-the-market offerings are the way to go.
As we have discussed, they’re Tesla’s preferred way to sell stock, because Tesla has enthusiastic retail
investors. When Hertz Global Holdings Inc. did a stock offering while it was in bankruptcy, to capitalize on
baffling (but in hindsight correct!) retail demand, of course it did an ATM. The big 2021 meme stocks
— GameStop, AMC Entertainment — have of course done ATMs.

Still you have to hire a bank for that, and maybe … that is hard … if …  uh, this:

The access to capital comes at a time of reckoning for the truckmaker, which flagged in June that it may
not be sustainable as a “going concern” without cash. Lordstown confirmed this month that it’s being
probed by the U.S. Justice Department and the Securities and Exchange Commission about claims it
 exaggerated potential sales of its electric Endurance pickup as it tries to move toward limited
production in September. 

If a bank signs up to do an at-the-market offering for you, and it sells a bunch of stock to retail investors,
and then you do get in trouble with regulators for exaggerating your truck sales, and you don’t continue as a
going concern, that bank is going to get very sued. If you’re just selling stock to enthusiastic retail investors,
it doesn’t really matter if you're paying a bank to do that, or a hedge fund. Anyone can take your stock, pass
it along to retail investors, and take a 3% fee. 

Papas don’t let your babies grow up to be investment bankers

I mean, fair:

“The technology sector has just completely changed the game,” said Jamie Lee, 37, who worked in
banking before starting a venture-capital firm this year. “The opportunity cost is simply too high to be
sticking around in a job where you’re not getting the treatment that you want.”

Mr. Lee’s father, the JPMorgan banker Jimmy Lee, was for decades one of the best-known players in his
field, advising companies like Facebook and General Motors before he died in 2015. But when the
younger Mr. Lee was finishing college in the mid-2000s, his father urged him to avoid the analyst
programs.

“He said, ‘Honestly, J, the way that I’ve seen that we work these kids, I’m not sure that I want that for
you,’” Mr. Lee recalled.

You could imagine a model in which one of the most influential investment bankers in the world, upon
seeing that investment banking was not a fit job for his own child, might say “hey we should change how
we treat our junior bankers to make it a more attractive career that I could recommend to my own family.”
But of course that’s not what happened. You become a senior investment banker so that your kids don’t
have to, and the way to make sure of that is to get lots of leverage out of the junior bankers. You keep your
analysts working until 4 a.m. to make money for you so that your own kids don’t have to become analysts.

Anyway that’s from an article about how investment banking is bad now:

But new college graduates are increasingly unwilling to put themselves through the strenuous two-year
analyst program, despite starting pay that can reach $160,000. That’s especially so as careers in
technology and other parts of the finance world promise better hours and more flexibility. The
pandemic, which forced many to reassess their work-life balance, has only underscored that thinking.
Others, like Mr. Iyoriobhe — who put in 90-hour weeks at Bank of America, sometimes going home only
to shower — are willing to do it for the minimum time necessary to put it on their résumés. He now
works at a private equity firm.
That paragraph conflates two very different outcomes? If banks attract a lot of top college graduates to
work in two-year analyst programs and then leave for private equity, that is … fine? Traditional? The model
of investment banks as elite finishing schools, etc. etc. etc., that’s how it has worked for many years now.
Ideally you can catch a couple of the best analysts, take them aside and say “hey you have a bright future
here and PE isn’t really all that good, please stay here,” but (1) that is hard because PE pays more and (2)
you have to do that real quick because PE firms now hire analysts the minute they arrive at their banks, if
not sooner. (“In recent years, recruiters for giant private equity firms like Carlyle and Blackstone … began
wooing analysts even before they started their jobs.”) Still, if your bank has a reputation as the place to go
to train future masters of the universe, something good will come out of that.

The other outcome though is that “new college graduates are increasingly unwilling to put themselves
through the strenuous two-year analyst program, despite” not only the starting pay but also the promise of
a private equity job in two years. They prefer to take tech jobs or whatever rather than get on the banking-
to-private-equity pipeline. The evidence for that is pretty anecdotal, and the story does start with an
anecdote about a guy who went to banking and then left for private equity. 

Especially not at Credit Suisse

Yeesh:

It’s a scene playing out from New York to Sydney as Credit Suisse struggles to retain its most talented
advisers and risks losing out on valuable deals in one of the hottest merger markets in years. More than
40 managing directors across the dealmaking side of the business have left since a pair of scandals
rocked the firm’s profits and image, including the M&A chief and five global heads or co-heads of
industry teams.

The departures have especially hit groups courting financial institutions and technology, media and
telecom companies, two areas of traditional strength for Credit Suisse. And of the 10 senior bankers the
firm tapped late last year for an elite squad to work on the biggest transactions across industries, three
have left in recent months.

Many top bankers are concerned about pay after the collapse of Archegos Capital Management cost the
bank $5.5 billion. They also fret about the firm’s reputation after it angered asset management clients
who had invested in now-frozen funds the bank offered with failed lender Greensill Capital. Credit
Suisse has handed out some retention bonuses to keep top performers, but it hasn’t halted the stream of
departures.

The real lesson here is that it is important for a bank not to make idiosyncratically bad trades. In 2007 and
2008, investment bankers had had a long run of doing tons of deals and making lots of money for their
banks; also, though, mortgage traders lost a bajillion dollars for those banks. That was very bad for the
traders’ bonuses, and also quite bad for the investment bankers’ bonuses and of course for everyone’s
reputation with clients. The M&A investment bankers, who were doing deals and serving clients and not
securitizing mortgages or destroying the financial system, had good reason to be mad at their trader
colleagues. But the investment bankers had nowhere to go: Every big bank was in roughly the same boat;
bonuses were down everywhere. (The investment bankers could go to boutiques, which mostly hadn’t
blown up on mortgage-backed finance; some of them did leave for boutiques, but the global financial crisis
was bad for M&A, which limited the appeal of this too.)

On the other hand, when Archegos blew up, most of its banks managed to get out with minimal damage;
Credit Suisse Group AG did not. And when Greensill blew up, Credit Suisse funds were big investors in its
business; other banks’ funds were not. Investment banking everywhere else is great! In fact, it is keeping
up banks’ profits in the face of declining trading revenue. The whole point of a universal bank is that your
different businesses are hedges to each other; when trading is bad M&A can pick up the slack, and vice
versa. But when your trading business is uniquely bad the M&A bankers just leave.

Legal realism

I feel like most regulation of big business works a lot like this:

Aon PLC and Willis Towers Watson PLC abandoned a more than $30 billion tie-up to create the world’s
largest insurance broker, deciding it wasn’t worth pursuing in the face of Justice Department opposition
to the merger.

The DOJ filed a lawsuit against the deal last month, the first big test of the Biden administration’s more
muscular antitrust policy. The suit, filed in a federal court in Washington, said that the proposed merger
would lead to higher prices and reduced innovation for U.S. businesses, employers and unions that rely
on their services. ...

“We reached an impasse with the U.S. Department of Justice,” Aon Chief Executive Greg Case said
Monday. “The DOJ position is remarkably out of step with the rest of the global regulatory community,
and we’re confident that we’d win in court,” he added, according to a transcript of a video message Mr.
Case gave to company employees.

The prospect of a lengthy court hearing was another reason for the merger’s demise. Aon and Willis
Towers had requested a court hearing for Aug. 23, but a federal judge ruled earlier this month that the
trial wouldn’t start until Nov. 18.

“The inability to secure an expedited resolution of the litigation brought us to this point,” Mr. Case said.
“Unfortunately, while we requested a speedy trial, the current course with DOJ would likely have taken
us well into 2022,” according to the transcript.
I have not read the filings in this case and am not really an antitrust expert; I have no idea if the Justice
Department (which called the abandonment of the deal “a victory for competition and for American
businesses”) or Aon and Willis Towers are right about the legality of the merger. The point is that if the
Justice Department doesn’t like a merger it can delay it for years, and if you want to do a merger that is
extremely inconvenient. So if the Justice Department decides “we’re going to be 20% tougher on mergers,”
there will be fewer big mergers, even if the law does not change, even if the Justice Department’s
interpretation of existing law is incorrect, even if all of the mergers would win in court, etc. Some
companies just won’t want to take the time to fight in court. (This does not work for mergers that already
happened: Facebook Inc. has all the time in the world to fight the Federal Trade Commission’s efforts to
unwind its Instagram merger.) 

Everything is like this. We have talked about the obvious fact that the current Securities and Exchange
Commission does not like special purpose acquisition companies; it particularly does not like how they use
aggressive financial projections to market themselves to retail investors. One thing it could do about this is
make a rule saying SPACs can’t do that anymore. Another thing it could do is argue that current rules,
properly interpreted, prevent SPACs from doing this; in fact an SEC official has made that argument (in a
speech, though, not in court). But a third thing it could do is just throw sand in the gears of SPACs: The SEC
has lots of ability to hold up offerings, and it decided to basically slow down every SPAC deal over a very
technical dispute about warrant accounting. This SPAC slowdown has made SPACs less attractive as
investments and deal partners, and has done a lot to deflate the SPAC boom.

At some limit, regulators are constrained by the letter of the law, but that is not always the important thing
to focus on. If you are a company it is convenient to be on good terms with your regulator and
inconvenient to be on bad terms. By shifting that balance of convenience, regulators can set policy.

Oh Elon

Sure:

Elon Musk dropped a bit of a bombshell on Tesla Inc.’s earnings call: He won’t necessarily be doing the
quarterly calls going forward.

“I will no longer default to doing earnings call,” Tesla’s chief executive officer said Monday. “Obviously
I’ll do the annual shareholder meeting, but I think that going forward I will most likely not be on
earnings calls unless there’s something really important that I need to say.”

Answering a question on whether he’d do interviews with YouTubers, Musk argued that there’s only so
much time in the day, and if he’s doing interviews, he can’t be doing other work.

Later that night he tweeted a meme about cephalopods. Look, he’s right! His point is not that if he’s doing
earnings calls that’s time he can’t spend designing the cars or whatever. His work is expansive. Elon Musk
adds an enormous amount of shareholder value to Tesla by being weird in public. He analyzes this in terms
of free advertising for Tesla’s products — he thinks his sense of humor helps Tesla sell more cars — while I
analyze it in terms of the stock market — I think his sense of humor helps Tesla sell more shares — but it’s
surely true. Every time he tweets about cephalopods he is making it easier for Tesla to raise money to
finance its projects.

On the other hand when he gets on an earnings call and analysts ask him financial questions, it ruins the
mystique:

Over the years, Musk has been a central feature of the calls. For example, on a call in April last year, he
went on a profane rant and accused authorities of “fascist” shutdown orders. On a call in 2018, Musk
said analysts were asking “boring, bonehead” questions. “We’re going to YouTube. These questions are
so dry. They’re killing me,” he said.

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The audience on earnings calls — analysts, investors, journalists — are not his people; he gets more bang for
his buck on Twitter or YouTube or Joe Rogan. Though I guess he could instead lean into his current
earnings-call approach. He could keep doing the earnings calls, and when some analyst asked him a
question about production schedules he could be like “did you know that a cephalopod has passed a
cognitive test designed for human children? ‘How do you do, fellow kids,’ am I right?” Just be as weird on
earnings calls as he is on Twitter and see what happens.

Things happen

Libor’s Final Days Begin With Push to Shake Up Swaps Market. Big Pharma Quietly Pushes Back on Global
Tax Deal, Citing Covid-19 Role. Pemex Is Building Refinery in Green Area It Promised to Protect. Bitcoin
Miner Crusoe Energy Seeks Loan to Expand Operations. Jeff Bezos, Fresh From Space, Offers to Waive $2
Billion for NASA Moon Contract. Former Glencore trader pleads guilty to role in Nigeria bribery scheme. “A
truck overturned on the eastbound BQE near exit 30 early Monday, spilling what appeared to be yellow
and orange bell peppers all over the highway.”
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1 This is drawn from (1) Lordstown’s 8-K, which summarizes the trade nicely, and (2) the actual
Equity Purchase Agreement with the details.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:

Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:

Brooke Sample at bsample1@bloomberg.net

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