REFILE-IPO VIEW-Companies using IPOs to fix balance sheets

(Refiles to fix typographical error 8th paragraph)

By Phil Wahba

NEW YORK, Sept 5 (Reuters) - With the market for initial public offerings as tight as it's been in years, investors are paying closer attention to how companies plan to use the proceeds.

In particular, they want to see companies use at least part of the money on the company itself and not just allow partners to cash out. The emphasis on bolstering finances comes as IPO investors demand healthier balance sheets and pay attention to growth prospects. Without these, investors are quick to shun flotations in favor of more attractive offerings down the road.

"The use of proceeds is even more scrutinized in this market," said Mark Hantho, head of equity capital markets for the Americas at Deutsche Bank AG (DB.N: Quote, Profile, Research, Stock Buzz). "Having a more conservative balance sheet is being more rewarded in the market than it has in a long time."

Companies seem to be getting the message. A majority of flotations so far this year have come to market with plans to use part of the proceeds to cut debt. Investors are cheering the trend because the credit crunch has sent debt and financing charges higher.

Earlier this decade, companies planning to go public ran up big debt loads and became too levered for today's tastes.

"In the 1990s, companies were newer, so a typical IPO would be capitalized 100 percent with equity," said Doug Baird, co-head of equity capital markets at Banc of America Securities LLC (BAC.N: Quote, Profile, Research, Stock Buzz). "But that has changed over time and more and more companies want and need to be de-levered."

So now going public is not just about building out an idea or to fund research and development, but also about making sure a company is properly capitalized, he said.

To be sure, paying off debt has always been part of what many IPO proceeds have been earmarked for. But with the credit crisis making borrowing more expensive, it has become even more pronounced and more crucial.

"Debt has become very expensive for non-investment grade borrowers," said Jay Ritter, a finance professor at the University of Florida at Gainesville.

And a lot of companies trying to go public are just these kinds of borrowers.

But the increasing trend of using money to pay off debt also reflects the near absence of venture-backed companies, which typically do not have much debt because their thin track records make it tough to borrow.

There have only been six venture-backed IPOs this year, most recently Web hosting company Rackspace Hosting Inc (RAX.N: Quote, Profile, Research, Stock Buzz) last month. Its shares are down more than 12 percent since the IPO priced on Aug. 7.

FAUX PAS

One of the cardinal sins in this market is for a company to use proceeds to pay off existing shareholders.  Continued...