4. Primary Markets Flashcards
What are the stages of an IPO?
- make decision on which bank/corporate finance house they will assign as underwriting firm
- that bank will then form the origination team
- Preparation of prospectus
- Sale of securities
What is another name for underwriting firm?
Lead manager (often the ‘sponsor’)
What is the origination team?
Range of advisors working with the lead manager to help company place a new issue of shares/bonds
What is a prospectus?
detailed document providing potential investors with information required to make informed decision on company and its shares
When is a prospectus required?
Whenever a company issues securities in order to raise capital from the public
what is a sponsor and their role?
- Listing agent
Role:
- Assess company’s suitability for listing
- assess best method of bringing company to market (main market for listing - not junior market)
- coordinate production of prospectus
What is the role of legal advisors in issuances?
Ensure all relevant matters covers in the prospectus
- due diligence
What is the role of public relations in an issuance?
Create positive perception of company
What is the role of accountants in an issuance?
Validates financial statements in prospectus
Which members of origination team perform due diligence?
- legal advisors
- accountants
Corporate broker
- interface between the company and the market
- advises company on current market conditions
What is another name for corporate broker?
Issuing house
what is a syndicate group?
Group of banks involved in helping issuing company
- made up of lead manager and co-lead managers
What is a lead manager?
Firm who is given the responsibility to co-ordinate the
issuance of securities through a syndicate - Generally the sponsor
What is a co-manager?
Firm who has been appointed by the lead manager to
assist in the issuance
What is a co-lead manager?
Firms given joint responsibility to coordinate the issue of securities
- usually in different geographical
areas
What is an issuing house?
– invites applications from public at a slightly higher price than the issuing house has paid the issuing company through an offer document
- usually an investment bank
What is the role of the bookrunner?
firm given the role to co-ordinate the overall level of investor demand
Typically the lead manager
- all banks can be involved but only one can be named bookrunner
What is the underwriter?
- a firm (or syndicate of firms) who guarantees a minimum level of proceeds from a share issue
What is the key difference between co-manager and co-lead managers?
Co-managers appointed by lead manager
Co-lead managers appointed by issuing firm
What is the purpose of underwriting?
- means of guaranteeing a minimum level of proceeds from a share issue
- used in all situations where share issues are generating proceeds (marketing operations)
What is the process of underwriting?
- Underwriter buys shares upfront (usually at a discount)
- However if they cannot all shares the risk lies with underwriter
What is ‘best efforts’ shares issuance?
- In the case that some shares remain unsold - shares go back to issuer
- risk lies with issuer
What is the structure of an underwritten issue?
Base deal - agree initial level of guarantee as base deal
- underwriting firm may ask issuer for a greenshoe option
What is greenshoe?
If issue is highly successful underwriters can issue more shares
- allows them to increase their offering by up to 15%
How many underwriters can there be?
Unlimited
What is stabilisation?
Where lead manager in an issue purchases stock in the secondary marker to support issue price
What are the regulations around stabilisation?
- has to have letter ‘s’ on exchange screen to let investors know its in the process of stabilisation
- can only stabilise for up to 30 calendar days after initial issue
Can greenshoe be used for other securities?
Yes - can also be used for issue of convertible and exchangeable bonds and works in the same way as for shares
What is an offer for subscription?
- public offer (investors can be members of public)
- issuing company issues shares directly to investors
- requires highly experienced company (rare)
What is an offer for sale?
- public offer (investors can be members of public)
- issuing company goes through issuing house to issue shares to investors
Why are public offers more expensive?
- more regulated as members of public are involved
- requires much more due diligence
What is a placing?
- not a public offer - for qualified investors only
- cheaper than offer for sale (because no need for prospectus)
Who might be offered shares in a placing?
- institutions and wealthy individuals
What is an introduction?
When a company obtains a listing without issuing new share capital
Why might a firm do an ‘introduction’
- for LIQUIDITY
- allows firm to list shares on more than 1 exchange
- introduces company on another market
- May be undertaken by a company that is already quoted on an overseas stock exchange and is seeking to expand its potential shareholder base on another exchange
What is a fixed price offer?
Where the price is fixed just below a point at which it is believed there would be full subscription, to encourage an active secondary market
What is a tender offer?
Book building process where minimum price is set and investors respond with prices and volumes they would be prepared to pay
What are the 6 main types of bond issuer?
- Governments
- Supranational bonds (eg. World bank)
- Municipal bonds (eg. states or local authorities)
- Agency bonds (gov. sponsored agencies eg. federal home loans bank in US)
- Special purpose vehicles
- Corporate
Where are municipal bonds issued?
Only in the US
What are the pros and cons of municipal bonds?
Pros:
They have tax advantages
- available only to those living in that particular state/local authority
- don’t need to pay federal income tax/need to pay less
Cons:
- not issued by central gov. so there is default risk
How is the default risk of municipal bonds managed?
The bonds are usually guaranteed by a third party
What is a Monoline insurer?
Third party that guarantees municipal bonds (for credit enhancement)
Why are municipal bonds attractive to investors?
Because interest income is exempt from federal income tax
- and in many cases, state and local taxes
What are agencies and why are they considered safe investments?
Government sponsored entities
- considered safe as they are backed by the gov.
What are 4 examples of agencies in the US?
- Government National Mortgage Association
- Federal Home Loan Mortgage Corporation
- Federal National Mortgage Association
- Student Loan Marketing Association
What does Ginnie Mae refer to?
Government National Mortgage Association
What does Freddie Mac refer to?
Federal Home Loan Mortgage Corporation
What does Fannie Mae refer to?
Federal National Mortgage Association
What does Sallie Mae refer to?
Student Loan Marketing Association
What do SPVs issue?
ABS (asset backed securities)
Who issues UK Gilts?
DMO
What two avenues can a DMO issuance take?
- competitive
- non-competitive
What are the features of a competitive GILT auction?
- minimum bid is £1m nominal value
- Only GEMMs can bid
- if bid is successful have to pay price stated in bid (so own price - every bidder pays different price)
What are the features of a non-competitive GILT auction?
- minimum bid is £1000 nominal value
- anyone can take part
- DMO sets price (weighted avg. price of accepted price bids) - everyone pay s same price
- this is usually used to issue a smaller tranche of the debt
What pricing system do French and German governments use?
Bid pricing system - v similar to UK system
What is the pricing system of US Government bond auctions?
- tender style (single-price auction)
What are US government auctions sometimes referred to as and why?
- Dutch auctions
- because every bidder pays same price
What price do investors pay in a US government bid?
Lowest of successful bids
Why do corporates issue bonds?
Need to raise debt capital regularly to fund developments in the business
What 2 alternative ways can companies issue bonds?
- scheduled programs
- shelf registration
What is a scheduled program?
- arrangement with a bank to borrow money rather than issue bonds
What is a shelf registration?
- single registration which covers multiple issues - can issue as many bonds as they like over 2 years
- this licence lasts up to 2 years
Where are shelf registrations typically used?
In the US with medium-term notes (MTNs) (which are usually issued on ongoing basis - scheduled program)
What is the maturity of MTNs
2 - 10 years
What is the main advantage of scheduled program debt issuance?
- provides opportunistic financing
- firms can take advantage of when interest rates fall (by issuing more bonds)
What is a reverse enquiry?
When companies receive requests from clients to issue a particular type of bond as part of this program
- if company thinks this is reasonable and there is sufficient demand will accept client request and issue bonds to meet terms
What are the 7 typical stages of a corporate bond issue?
- Pitching
- Indicative bid
- Mandate announcement
- Credit rating
- Road show
- Listing
- Syndication
What is the pitching stage of a corporate bond issue?
Where investment bank(s) interested in managing the issue make a pitch – a presentation to the issuer
What is the indicative bid?
An indication given by the investment bank to the issuer regarding how much the bond issue might raise
What is the mandate announcement?
Announcement of the bank(s) given the
mandate to manage the bond issue
What is the credit rating stage of corporate bond issuance?
Investment bank will try to obtain a favourable credit
rating for the issue from a rating agency
What two key outcomes depend on credit rating of the bond?
- success of the issue
- interest rate required by investors
What is a roadshow?
Series of meetings with potential investors and brokers, conducted by a company and its underwriter, to market the issue
