Chapter 4: Primary Markets

Question 1

TYPES OF OFFER

Question 2

Initial public offerings (IPO)

Answer 2

A company moves from privately owned to publically owned by selling shares on the open mrket for the first time.

IPOs reduce the amount of control the original owners have as selling shares also sell voting rights with them.

Question 3

IPO +

Answer 3

• Raise loads of dosh
• Gets the subject company lots of publicity
• does not encumber company assets as collateral like debt offerings.

Question 4

IPO -

Answer 4

• Loss of voting rights
• New shareholders can appoint a new board of directors, removing power from previous owners
• Shares can be resold onto secondary markets so the origiinal owners have no control of who buys the shares.
• Can be taken-over by another firm

Question 5

IPO strucuture (number of shares, over allotment)

Answer 5

IPOs are structured with a set number of shares to be sold at IPO.
The firm can also reserve the right to sell more shares if there is demand for more shares than on offer.

The option to increase the number of shares sol (by a pre-set maximum) is called a greenshoe or over allotment clause these terms are included in the underwriting docs.

Question 6

3 key stages to an IPO

Answer 6

1. Decision - the issuing firm and advisers (IB,ECM) decide to raise capital via an IPO following consideration of = and -
2. Prep of teh prospectus - prospectus=official foc outlning terms of the IPO. Is constructed together by all advisers (IBC, legal, accounting)
3. sale of securities - IB will lead-manage the sale and can establish a syndicate of co managers to assist by selling the securities to their clients.

Question 7

Underwriting and best efforts underwriting

Answer 7

• Responsibility of the banks that manage the sale.
• Put guarantees in place to buy securities if the sale is unsuccessful/a target isn’t met.
• Best efforts underwriting= no commitment from banks to buy securities but they will do their best to sell all shares in the offering. This reduces the risk of loss to the bank having to buy shares but can cause reputational damage if shares remain unsold.
  *

Question 8

Follow on offerings/secondary offers

Answer 8

• Already listed company wants to list more shares in a follow-on offering.
• Usually conducted in a strong equity market to ensure shares sell.
• Like an IPO - there is a base offering number of shares and a greenshoe
• Usually quicker and cheaper than an IPO as the firm has been through it all before
• Same 3 main stages as an IPO

Question 9

Follow on offering underwriting

Answer 9

• Follow-on offering can be underwritten by banks or best efforts underwriting by other banks and brokers.
  *

Question 10

3 major ways that a firm can use IPOs to become listed

Answer 10

1. offer for sale (most common way)
2. placings
3. introductions

Question 11

Offer for sale

Answer 11

The issuing company sells it’s shares to the issuing house (IB) which will then invite public offers to buy the shares at a higher price that what the IB paid for them.

The company doesn’t neccessarily have to issue new shares as it can just sell shares held by owners

Question 12

Offer for sale diagram

Answer 12

physcial

Question 13

Offers for sale - fixed and tender price offers

Answer 13

• Fixed price offer - price is fixed just below the price that is believe to be perfect to achive full subscription of shares (selling them all) to boost secondary market activity. If the offer is over subscribed due to the favourable pricing, each application can be scaled down or random requests can be picked at random.
• Tender offer - Sets a price that is less attracitve than fixed price to avoid over subscription. The issuer doesn’t stipulate a fixed share price but invites tenders for the issuer by setting a minimum tender price instead. Investors state how many shares they want and the price they are willing to pay for each one. More complex than ^

Question 14

Over allotment options

Answer 14

HAs become almost standard practice to use a greenshoe/over allotment option.

Gives the underwriter the right to sell an additional 15% of teh original number of shares at IPO price if demand is high. It helps smooth out price fluctuations if demand surges and supports the IPO if the market is having a stinker.

Question 15

Selective marketing and placing

Answer 15

Placing = a firm markets their equity issue directly to a broker/issuing house which places shares with selected clients. Least expensive. Can be used

Placing is often referred to as selective marketing as the intermediary selects the clients that the offer is directed to.

Question 16

Private placements (2nd type of issue)

Answer 16

A prospectus is a mandatory requirement pre-IPO to outline the key details of the offering and the business plan etc.

The prospectus is less stringent for accreditied investors as they are exempt from MiFID regulations.

Question 17

Introductions (third way a company can become listed)

Answer 17

Not an issue of shares and not a marketing technique
Used by companies that do not wish to raise capital by issuing shares but want to increase the liquidity of their shares. it could be a company listed on another foreign stock exchange moving’

Question 18

Convertible bond offerings

Answer 18

Same as equity with greenshoe and pre decided number fo bonds being sold

Question 19

Listing advisers, reporting accountants, legal advisers, PR consultants, corporate brokers - roles

Answer 19

• Lisiting agent/sponsor - investment bank - assesses suitability for IPO, best method of IPO, coordinating the listing. Called Nomad in AIM market.
• reporting accountants/public auditors - attest to the validitiy of a firm’s fin. info. in the prospectus
• legal advisors - ensure the prospectus meets regulation/is accurate.
• PR consultants - Improve/maintain positive public opinion of the firm
• corporate brokers - acts as an intermediary between teh issuer and the stock market, advising on mkt conditions etc.

Question 20

Underwriting

Answer 20

=Agrement with fin. institutions to buy shares that are not sold (shortfall). Acts as an insurance policy. The underwriters recieve fees regardless of the performance of the IPO.

The underwriter will tend to agree to buy shares (in teh event of shortfall) at a discounted price.

Guarantees the issuer a minimum capital gain/subscription.

Question 21

Stabilisation

Answer 21

=lead manager agrees to support the price by buying back the newly issued securities if the price falls below a certain predefined level. Allows the market to adjust to the influx of new securities.

It increases the demand for the securities whilst new ones are issued = price stabilises = security appears less volatile = investors don’t panic sell. The lead manager will resell the stock once the price stabilises.

Greenshoe is another stabiliser option.

Question 22

What is the syndicate group and the roles within it. (Sponsors and managers/co-managers)

Answer 22

• Large listings with large numbers of shares - the sponsor will gather a syndicate of IBs and brokers to market teh shares to their clients.
• Sponsor acts as a lead-manager who appoints co-managers. If the issue is big enough, more than 1 lead-manager can be appointed.
• Managers and co managers contact large scale investors and determine a price (10-15% max price range from upper/lower values)
• When price range is announced, marketing begins, leading to subscription requests

Question 22

Book building

Answer 22

=The process finding buyers of the shares.

The lead-manager(s) guage demand across the syndicated = called the Book runner

Question 23

UK regulation of stabilisation

Answer 23

FCA requires disclosure to the market that stabilisation is taking place and that the market price might not be a true representative as a result.

Exchanges can use circuit breakers to suspend trading in the event of high volatility.

Question 24

Stock exchanges

Answer 24

Facilitates secondary market trading of listed securities. Trades are arranged by stock brokers.

Question 25

Regulatory framework for exchanges

Answer 25

Regulatory framework for exchanges
1. Determine which securities can be listed and laying out requirements for a firm to list securities.
2. Set rules/regulations for subsequent trading of securities by teh members of the exchange.

3 strands - the law, requirements of the local regualtor and teh rules of the exchange itself.

Question 26

Admission criteria for listing on an exchnage

Answer 26

1. Filing of the prospectus to the regulator by the sponsor (supported by auditors and legal) and made public by the regulator.
2. Application to the stock exchange - must prove requirements of teh exchange are met (min. no. of shares issued, sufficient free float, IBs are willing to trade the security once issued)

Developed countries typically have more than 1 market - UK - LSE and AIM. AIM is far less stringent and allows smaller firms to grow rapidly.

Question 27

UK main market lisiting requirements

Answer 27

For securities listed within the FCA ‘Official List’
* 2 types of listing - standard = requiremetns are derived from the EU reqs. Premium - listing stndrds. above EU minimum. Only applicable to equities.

• Uk incorporated and has a sponsor to link the FCA and the firm
• £30 million marekt cap
• 3 year min. trading record
• Min. 10% of shares are to be issued to the public (excludes directors or other exisiting UBOs of 5% or more)
• Must publish a prospectus
• Restricted ability to issue warrants over 20% of issued shares.
• Listing fee has been paid.
• Debt - min value of isued debt = £200K
• All listed companies to meet regulatory requirements

Question 28

UK junior market listing requirements (AIM) and continuous obligations

Answer 28

AIM companies listing requirements are set by the LSE not FCA.
* Must have an LSE approved nominated advisor (nomad) to assess the firm’s lisiting suitability.
* No restriction of transferability of shares
* Must appoint a broker - to facilitate trading, ensure the shares have market and provided ongoing info to investors.
* No min mkt cap, free float or ownership requirements.

LSE imposed continuing obligations on AIM firms:
* broker and advisor can be the same firm
* If the firm loses a broker/advisor the shares are suspended from trading
* If the firm is without a broker/advisor for more than a month it is removed from AIM.

Question 29

Bond offerings - who can issue them - 6

Answer 29

• Supranationals - organisations like the world bank
• Governments
• Agencies - often govt backed - e.g. US federal national mortgage association (Fannie Mae)
• Municipalities - regional governments/states
• Corporates
• Fin. institutions and SPVs - leveraged SPVs to raise money offf balance-sheet

Question 30

Bond issuance - traditional parameters

Answer 30

• Bond issuances were only logical when large sums of £ were involved
• Bonds specifics would be established - coupon, maturity.
• Bonds would be marketed to investors
• Investors could bid for bonds in an auction type process or a tender method was used.

Question 31

DMO bond issuance example - most common bond issuance type, how are the bonds allocated

Answer 31

DMO - UK Treasury dept that issues gilts.
* Most common bond issuance method = auction
* DMO announces the auction - recieves bids - allocates bonds to the highest bidders
* Gilt edged marekt markers (GEMMs) bid for gilts when they are first issued.
* DMO will take the gilts onto it’s own book if not all bonds are subscribed for.
* Used tenders up until 1987 to sell gilts

Question 32

Shelf registration impact on bond issuances

Answer 32

Shelf registration - originated in the US= 1 bond registration can be used for multiple bond issues over a 2 year period. Made debt financing much more attractive as each bond issue had to be recorded seperately before which was expensive.

Allowed firms to issue smaller batches of bonds with varying maturity times and coupons.

Involved finding 2 dealers to market the bonds to their clients on a best effort basis. The bonds were then issued.

Question 33

What are reverse inquiries

Answer 33

When a client approaches an issuer and asks for bonds to be issued with a coupon/maturity that meets thei needs.

The issuer can decide whether to accept or reject the request

Question 34

7 Roles of the origination team - DCM

Answer 34

Origination team similar to that of equity issues: issuer, IB, reporting accountants, legal and PR.
Stages:
1. Pitching - issuer decides if the bond issue is appropriate and which IBs it wants to use (IBs will bake off for the business)
2. Indicative bid - IBs provide an estimate of how much finance is likely to be raise by the issuance
3. Mandate announcement - Issuer announces the IBs being used to issue the bonds
4. Credit rating - bond issuance recives a credit rating - affects amount of capital raised. Issuers might have to explore credit boosters like insurance.
5. Roadshow - IB markets the bonds to potential investors (usually travelling to fin. hubs to meet clients)
6. Listing - listed bonds need a prospectus to be submitted to the regulator
7. Syndication - for large issuances - lead manager will recruit co-managers to help sell bonds to their individual client base.

Question 35

n

DONE!!!!!!

Question 36

Benefits of private placing

Answer 36

No underwriting needed
Prospectus can be far less detailed
Cheaper