Chapter 4: Primary Markets Flashcards
What is a greenshoe, or over-allotment clause?
Enables companies to increase the number of shares offered at IPO.
What are the 3 broad stages to an IPO?
The decision
The preparation of the prospectus
The sale of securities
Who underwrites the offer?
Investment bank or banks that manage the sale
What is a “firm” underwriting?
Where there is a guarantee in place to purchase the securities
What is a “best-efforts” underwriting?
Where banks will do their best to sell the shares from the offering
What is the risk the underwriter may take on in a “best-efforts” underwriting?
If the IPO is under subscribed, they may suffer reputational damage - meaning less likely to be involved in future IPOs
What is a follow-on offering commonly referred to as?
Secondary offering
When would a company not do a secondary offering?
In a bear market
What are the 3 ways that a company can use IPOs?
Offers for sale
Placings
Introductions
What is an offer for sale?
Issuing company sells its shares to a issuing house (usually investment bank), who then take on the role at selling them to to public at a higher price
What is a fixed-price offer?
Price is usually fixed at just below where it is believed the issue should be fully subscribed
What is the benefit of a fixed-price offer?
Encourages an active secondary market
What is a tender offer?
Company sets a minimum tender price
Investors state the number of shares they wish to purchase and which price they are willing to pay
What happens when a tender offer closes?
A single settlement price is determined by the issuing house, and all applications at or above will be accepted at that price
Which offer type is more common?
Fixed-price
What is the benefit of tender offer over fixed-price?
More efficient way of allocating shares and maximising proceeds
What is the downside of tender offers?
More complex to administer
Where does the term greenshoe come from?
Green Shoe Manufacturing Company is 1919 was the first company to be permitted to do a over-allotment option
What does the over-allotment option allow underwriters to do?
Sell up to an additional 15% more shares if demand is in excess
How can the underwriter to support the stock price in case of adverse market conditions?
They can buy shares on the open market
What is a selective placing?
Company markets issue directly to broker/issuing house which in turn places the shares with selected clients
Why is a placing sometimes referred to as selective marketing?
Because the intermediary is selecting the clients on who to offer to
What is a private placement?
A placement offered directly to a restricted class of investors, known as “sophisticated, qualified or accredited”
Why are private placements not allowed to be offered to the public?
They have not filed a formal prospectus or offering document that is required by regulation to offer shares to regular investors
What does a prospectus outline?
Details regarding the offering
Detailed business plan
How the proceeds will be used
Director details
Risks disclosure
What are the regulations for private placements in the UK, EU, US?
UK - Prospectus Regulations (reflect EUs regs)
EU - Prospectus Directive (PD)
US - Reg D
What is an introduction?
A direct listing of a company shares into a new secondary market
A way of gaining liquidity by offering into a new market - e.g. ADR?
What is a hybrid instrument?
One that has characteristics of bonds and equities
What does an exchangeable bond offer to the investor?
Right to exchange the bond for a set number of shares, but the shares are not those of the bond issuer - but of another companies shares held by the issuer.
What benefits do exchangeable bonds offer to investors?
Safety of coupons and repayments, combined with the potential upside of equity growth
What benefits do exchangeable bonds offer to issuers?
Can raise borrowed funds more cheaply, as they are more attractive to investors
What is the negative of IPO to the company?
Loss of company control, higher disclosure requirements
How are exchangeable bonds similar to IPOs?
The offer can be underwritten by banks
What is a listing agent sometimes known as?
Sponsor
Who can be a listing agent?
Investment bank, stockbroker, financial services firm
What does a listing agent do?
Assessing company suitability for IPO
Best method of listing
Organising prospectus
What is the listing agent / sponsor known as in LSE’s AIM?
Nominated advisor (nomad)
What do reporting accountants sometimes known as?
Public auditors
What do reporting accountants do?
Attest to validity of financial information provided in the prospectus
What is the origination team?
Corporate broker
Acts as an intermediary between the company and the stock market, advises on market conditions
How would corporate governance be modified for an IPO?
Reducing the influence of a single individual
Qualified financial director
What is a Syndicate Group?
Listing agent gathers together a syndicate of investment banks and institutional clients to market shares to their clients
When are Syndicate Groups used?
For large listings
What is a road show?
Marketing events held by institutions pitching IPOs to clients
What is the process of finding buyers for issuing company’s know as?
Book-building
What is a lead manager
Manager taking responsibility of an area (geographical etc) in a Syndicate Group
How much can price ranges differ between different lead managers in a Syndicate?
10-15%
What is a book runner?
Lead managers who coordinate overall demand across a Syndicate
How does price finalisation occur in a Syndicate?
Syndicates will market shares at a price range, and price will be set based on demand
What is underwriting?
Contracts with financial institutions that guarantee share purchase if demand is insufficient
Commonly at a discount to what is to be offered to the public
What is stabilisation?
Lead managers agreeing to support the price by buying in the secondary market if the price falls below a certain level
What happens to the shares purchased during stabilisation?
Sold into the open market over time
What does the FCA require during stabilisation?
Disclosure to investors that it is occuring
How else is stabilisation enforced?
Volatility circuit breakers
Greenshoe options
What are the 3 major constituents for regulation in the LSE?
The law - UK Companies Act
FCA
LSE Rule Book
What does the FCA have to give before an exchange is allowed to be operated in the UK?
Recognition, becomes a recognised investment exchange (RIE)
Lays down rules that have to be met before a company can be listed
What are the two stages of listing?
Prospectus documentation
Application to stock exchange
What are the two markets on the LSE?
The Main Market
AIM
What are the requirements for entering the main market?
Must be plc
>£30m market cap
3 years books
10% of shares in public hands
prospectus
cannot issue warrants for more than 20% of share capital
Who do you have to appoint to enter the AIM?
Appoint two people
Nomad - Nominated Advisor - exchange expert
Broker, ensure sufficient liquidity
What is a supranational?
Global organisations, e.g. World Bank
What are agencies? (bonds)
Issue bonds for particular purposes, usually gov backed
E.g. Fannie Mae
What is the most common pricing method for the DMO?
Auction
What are the two pricing methods for bond issuance?
Tender
Auction
Who can bid on bond issuances?
GEMMs - Gilt-edged market makers
What happens if auction is not fully taken up?
DMO can take the gilts ono its own books
How does a tender offer work?
Imagine the auction is for £1 million nominal and the minimum price is £100 for £100 nominal. The
bids submitted are:
- A offers to buy £0.5 million nominal, paying £101.50 for every £100 nominal.
- B offers to buy £0.5 million nominal, paying £100.75 for every £100 nominal.
- C offers to buy £0.5 million nominal, paying £100.50 for every £100 nominal.
- A offers to buy £0.5 million nominal, paying £101.50 for every £100 nominal.
- B offers to buy £0.5 million nominal, paying £100.75 for every £100 nominal.
- C offers to buy £0.5 million nominal, paying £100.50 for every £100 nominal.
In this instance, A and B are awarded the gilts, but both pay the lower price: £100.75 (the highest
price at which all the gilts could be sold).
What was introduced to allow companies to regularly issue bonds in the U.S.?
Shelf registration, allows companies to issue bonds over two years
What term have shelf registrations commonly been used for?
MTNs
2-10 years
What is it called when investors request bond terms from a company?
Reverse inquiries
What is pitching?
Investment banks interested in assisting in the issue will pitch to the issuer
What is the indicative bid?
Banks will detail their view during pitching on how much the issuer is likely to raise given the terms of the bond issue
What is the mandate announcement?
Issuer announces which bank(s) have been given the mandate to arrange the issue
What is a co-lead manager
Situation where lots of interest so a lead manager role is split out - maybe by geographical areas
