Capital Raising Process

Question 1

What is the definition of underwriting and what does it involve?

Answer 1

Process where bank raises capital for a corporation, or institution from investors in the form of equity or debt securities. The process involves conducting research, financial modeling, valuation, and marketing a deal.

Question 2

What are the types of underwriting and what do they entail?

Answer 2

1. Firm Commitment - underwriter agrees to buy the entire issue and assume full financial responsibility for any unsold shares.
2. Best efforts - underwriter commits to selling as much of the issue as possible at the agreed-on offering price, but can return any unsold shares to the issuer without financial responsibility.

Question 3

What are the steps in the book building process of underwriting?

Answer 3

1. Indicative price range
2. Institutional investor commitment at firm price
3. Book of demand built
4. Price is set to ensure clearing
5. Allocation

Question 4

What are the key issues in pricing?

Answer 4

1. Price stability
2. Buoyancy after market
3. Depth of investor base

Question 5

Why is there a temptation for an advising bank to underprice an issue?

Answer 5

1. Reduces the risk of equity overhang.
2. Ensures after market in buoyant
3. But this fails to make the best possible return for the current owners and could lead to profit-taking and hence volatility.