Ch 20: New Issues Mkt

Question 1

The proceeds of the sale in the secondary mkt do NOT go to __. They go to __.

Answer 1

do NOT go to issuer.

they go to the selling shareholder/bondholder

Question 2

Issues MUST… and meaning of this?

Answer 2

MUST file a registration statement w the SEC.

When the SEC reviews the doc during the 20-day cooling off period, it looks for SUFFICIENCY OF INVESTM INFO (NOT ACCURACY).

Question 3

Near the end of the cooling off period, the underwriter holds a…

Answer 3

due diligence meeting. The underwriter must conduct a formal due diligence meeting to provide info about:

1) the issue
2) the issuer’s fin background
3) intended use of proceeds.

Question 4

due diligence for muni rev bonds

Answer 4

When underwriting muni rev bonds, due diligence relies on FEASIBILITY STUDY, which focuses on the projected revs and costs associated with a project and an analysis of competing facilities.

Question 5

As part of the due diligence process, I-Bankers must…

Answer 5

• examine the use of the proceeds
• perform fin analysis and feasibility studies (muni rev bonds)
• determine co.’s stability, and
• determine whether the risk is reasonable

Question 6

functions of an underwriter may include:

Answer 6

• advising corps on the best ways to raise LT capital
• raising capital for issuers by distributing new securities
• buy securities from issuers and resell them to public
• distributing large blocks of stock to the public and to institutions, and
• helping issuers comply with securities laws

Question 7

underwriting manager / syndicate manager

Answer 7

i-banker who negotiates with the issuer and directs entire underwriting process (including signing the underwriting agreement with the issuer and directing due diligence meeting / distribution process)

syndicate MAY have more than 1 manager

Question 8

*underwriters

Answer 8

i-bankers who help issuers raise money through the sale of securities.

they do NOT loan money.

all underwriters of corp securities must be FINRA member firms. Underwriters of munis must be MSRB members

Question 9

syndicate? and what are they binded by?

Answer 9

syndicate / selling syndicate is a group of underwriters formed to purchase/underwrite a new issue of securities from issuer and then resell to the general public. syndicate is organize to share risk of underwriting the issue, getting enough capital to purchase an issue, and broaden distribution channels of issue to the investing public. Financial commitment!!!

Syndicate members sign syndicate agreement / synd letter which describes the participants’ responsibilities and allocation of syndicate profits.

Syndicate and selling groups may be assembled either before or after the issue is awarded to the underwriter.

Question 10

negotiated underwriting

Answer 10

standard in underwriting corp securities bc of how close the biz relationship b/w corps and IB firms are

issuer sand ibanker negotiate the offering terms, including:

• the amt of securities to be offered
• offering price/yield
• underwriting fees

Question 11

competitive bid underwriting

Answer 11

state/muni gov invites ibankers to bid for a new issue of bonds. Issuer awards the securities to the underwriter whose BID RESULTS IN THE LOWEST NET INTEREST COST TO THE ISSUER aka true interest cost to issuer.

most often for GO muni securities and are often required by state law

Question 12

selling group

Answer 12

members act as agents with no commitment to buy securities

selling group members sign a selling group agreement with underwriters, which usually contains

• statement that manager acts for all underwriters
• amt of securities each selling group member will be alotted + tentative POP that securities can be sold at
• portion of underwriting spread (aka the concession) to be received on sales made by selling group members (THIS IS THE LARGEST PORTION OF THE SPREAD)
• provisions on how and when payment for shares is to be made to the managing underwriter, AND
• legal provisions limiting each selling group member’s liability in conjunction with the underwriting

Question 13

***test: Syndicate members take on __ and act in a ___ capacity.

Answer 13

take on fin liability and act in a PRINCIPLE capacity.

Selling group members have NO fin liability and act as AGENTS bc they have no commitment to buy securities from the issuer.

Question 14

most common type of underwriting contract

Answer 14

firm commitment - banks commit to buy securities from issuer and resell them to the public
- all synd members commit to buying from the issuer, then distributing on an agreed amt of the issue (their participation)

FINANCIAL OBLIGATION (takes on any losses) bc managing underwriter buys the securities from the issuer.
- he acts

firm commitment underwriter can EITHER be negotiated underwriting contract or a competitive bid agreement.

1) NEGOTIATED - used in most corp issues. the issuer selects an underwriter and negotiates the conditions of the underwriting contract
2) COMPETITIVE BID - standard for new issue offering in muni securities mkt. Sales begin on effective day of the offering

Question 15

test: a case where the issuer receives the proceeds and is NOT a primary offering…

Answer 15

when co. resells treasury stock, it receives the proceeds. Because those shares were previously owned, it cannot be called a primary offering.

Question 16

*what is NIC?

Answer 16

Net Interest Cost

Commonly used for comparing bids and awarding the bond issue.

It combines the amt of proceeds the issuer receives with the total cpn int it pays. It’s a straight mathematical interest-rate calc.
- LOWEST NIC IS WINNER

TRUE INT COST (TIC) provides same type of cost comparison adjusted for time value of money.
- TIC weights early interest paym more heavily to give greater value to dollars of today over future dollars

Question 17

on a negotiated underwriting, the i-banker who negotiates with the issuer is known as:

Answer 17

syndicate manager / underwriting manager / lead underwriter

Question 18

test: why are syndicates formed?

Answer 18

to spread the risk among several underwriters

Question 19

standby

Answer 19

type of firm commitment UNIQUE TO CORP RIGHTS OFFERINGS

When a co.’s current stockholders do NOT exercise their preemptive rights in an additional offering, a corp has an underwriter STANDIING BY to buy remaining unsold shares as a result of rights expiring

issuer ensures all shares being offered are sold

Question 20

best efforts

Answer 20

underwriter sells as much as possible, no fin liability for unsold shares.
- agency capacity (no fin risk)

Question 21

all-or-nonee underwriting

Answer 21

type of best efforts underwriting

underwriter must either sell ALL shares or CANCEL underwriting
- bc of the uncertainty of the outcome, any funds collected from investors during offering period must be HELD IN ESCROW PENDING FNIAL DISPOSITION of underwriting

Question 22

Mini-max offering

Answer 22

type of best efforts underwriting

sets a floor/min (least amt the issuer needs to raise to move fwd with the underwriting) and ceiling/max on dollar amt of sec the issuer is willing to sell

most frequently used in limited partnership program offerings
- funds collected from investors during offering period must be held in ESCROW pending final disposition

Question 23

difference between how participants formalize syndicate relationships for negotiated underwriting vs competitive underwriting

Answer 23

negotiated underwriting - participants sign a syndicate contract / agreement among underwriters

competitive underwriting - (munis!!!) syndicate letter / syndicate agreement

Question 24

Whether a firm decides to be a syndicate member is after they consider:

Answer 24

• potential demand for security
• existence of presale orders
• determination and extent of liability
  scale and spread, and
• ability to sell the issue

Question 25

syndicate letter includes:

Answer 25

• each member’s level of participation/commitm
• priority of order allocation
• duration of syn acct
• apptment of manager as agents for thee acct
• fee for managing underwriter and breaakdown of the spread, and
• other obligations (expenses, good-faith deposits, observance of offering terms, liability for unsold bonds etc)

***syndicate letter are NOT legally binding UNTIL SYND’S SUBMISSION OF THE BID.

Question 26

Types of underwriting syndicates

Answer 26

1) Western acct

2) Eastern Acct

Question 27

Western acct

Answer 27

divided acct (each underwriter is ONLY responsible for its own underwriting allocatioin)

Question 28

Eastern acct

Answer 28

undivided acct (each underwriter is allocated a portion of the issue, then allocated any additional unsold bonds. Underwriter’s fin liability does NOT end with initial allocation)

Question 29

if syndicate wins bid…

Answer 29

then that syndicate member will be selling the bonds to the public in the IPO

Question 30

process of establishing the syndicate bid

Answer 30

purpose: discuss proposed reoffering scale and spread for underwriters. GOAL is to arrive at the best price to the Issuer while making a profit.

Prelim meeting - manager seeks a tentative agreement from members on PRICES/YIELDS OF ALL MATURITIES IN THE ISSUE AND GROSS PROFIT AKA UNDERWRITING SPREAD (diff between what the public pays and what the issuer receives)

Writing the scale - process of establishing the reoffering yield aka price for each maturity (list of bond issue’s diff maturities.) 1st determine prices aka yields to be able to sell the different serial maturities, then back into bid.

Meeting right before the bid is due - final bid price set (majority wins)

Question 31

disclosure of fees

Answer 31

fees paid to clearing agency and synd manager must be disclosed to syndicate members in advance (usually part of syn letter/agreement to underwriters)

mgmt fees aka any amt oof gross spread paid to manager alone is and not shared with synd members.

Question 32

*how to win the synd bid?

Answer 32

price where lowest int rate that can win the bid AND provide a competitive investm to public buyers AAND make profit for underwriter

Question 33

awarding the issue

Answer 33

issuing municipality meets with their attorneys/acctants, analyzes bid, then awards muni bond issue to LOWEST NIC ISSUER.

Issuer keeps the successful bidder’s good-faith deposit (to ensure syn carries out commitment) and returns the other remaining syndicates’ good-faith deposit.
- usually 1-2% of total par value of offering = good-faith deposit

when awarded, a SYND ACCT is created. synd manager is responsible for keeping the books and managing acct.

• ALL SALE PROCEEDS ARE DEPOSITED TO THIS ACCT, ALL EXPENSES PAID OUT OF THIS ACCT
• SETTLEMENT OF SYND ACCTS IS 30 CAL DAYS AFTER ISSUER DELIVERS THE SECURITIES TO THE SYNDICATE (so max amt of time for synd to exist is 30 cal days from time the issuer delivers the securities to the synd)

Question 34

price that bonds get sold to the public

Answer 34

reoffering price aka reoffering yield

synd’s compensation for underwriting new issue is thee SPREAD = price synd pays issuer - reoffering price

Question 35

*“production”

Answer 35

total dollar sales earned from a muni issue

production - amt bid for the issue = spread