Ch 20: New Issues Mkt Flashcards
The proceeds of the sale in the secondary mkt do NOT go to __. They go to __.
do NOT go to issuer.
they go to the selling shareholder/bondholder
Issues MUST… and meaning of this?
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).
Near the end of the cooling off period, the underwriter holds a…
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.
due diligence for muni rev bonds
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.
As part of the due diligence process, I-Bankers must…
- 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
functions of an underwriter may include:
- 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
underwriting manager / syndicate manager
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
*underwriters
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
syndicate? and what are they binded by?
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.
negotiated underwriting
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
competitive bid underwriting
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
selling group
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
***test: Syndicate members take on __ and act in a ___ capacity.
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.
most common type of underwriting contract
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
test: a case where the issuer receives the proceeds and is NOT a primary offering…
when co. resells treasury stock, it receives the proceeds. Because those shares were previously owned, it cannot be called a primary offering.
*what is NIC?
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
on a negotiated underwriting, the i-banker who negotiates with the issuer is known as:
syndicate manager / underwriting manager / lead underwriter
test: why are syndicates formed?
to spread the risk among several underwriters
standby
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
best efforts
underwriter sells as much as possible, no fin liability for unsold shares.
- agency capacity (no fin risk)
all-or-nonee underwriting
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
Mini-max offering
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
difference between how participants formalize syndicate relationships for negotiated underwriting vs competitive underwriting
negotiated underwriting - participants sign a syndicate contract / agreement among underwriters
competitive underwriting - (munis!!!) syndicate letter / syndicate agreement
Whether a firm decides to be a syndicate member is after they consider:
- potential demand for security
- existence of presale orders
- determination and extent of liability
scale and spread, and - ability to sell the issue
syndicate letter includes:
- 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.
Types of underwriting syndicates
1) Western acct
2) Eastern Acct
Western acct
divided acct (each underwriter is ONLY responsible for its own underwriting allocatioin)
Eastern acct
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)
if syndicate wins bid…
then that syndicate member will be selling the bonds to the public in the IPO
process of establishing the syndicate bid
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)
disclosure of fees
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.
*how to win the synd bid?
price where lowest int rate that can win the bid AND provide a competitive investm to public buyers AAND make profit for underwriter
awarding the issue
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)
price that bonds get sold to the public
reoffering price aka reoffering yield
synd’s compensation for underwriting new issue is thee SPREAD = price synd pays issuer - reoffering price
*“production”
total dollar sales earned from a muni issue
production - amt bid for the issue = spread
