ECM and DCM

Question 1

What is an equity capital market?

Answer 1

Equity capital markets in the business of raising equity for things such as IPOS and SEO.

Question 2

What is the advantage of a company going public?

Answer 2

• raise substantial equity
• establish a value for the company - market value
• raise awareness
• acquisition target
• prestige and financial accountability
• employee stock and incentives
• exit opportunity

Question 3

Who are the typical IPO investors?

Answer 3

retail investors, institutional investors, hedge funds, pensions and mutual funds.

Question 4

What is the most important part when launching an IPO?

Answer 4

Is the company growing also: does the company have stable finances, good visibility and liquidity.

Question 5

What is the order of preference for investors for an IPO with IBs?

Answer 5

Retail investors - long term focus
Institutions - with a long term
early order clients
those that understand the business
solid track record with the bank
then hedge funds

Question 6

What are the factors that dictate the value of a company’s IPO?

Answer 6

Book Building is the core process used to determine the price. Discount to incentivise investors and ensure no bitter taste. valuation: DCF, CC and precedent transactions, multiples comparisons and deal comparisons. Negotiations, Types of investors and demand.

Question 7

How long does the process for launching an IPO typically take?

Answer 7

4-6 months, 4 for prelaunch and 2 for execution.

Question 8

What are the typical steps during a prelaunch of an IPO?

Answer 8

1. Pre IPO report: price range, institution details.
2. distribute this to the appropriate investors.
3. more detailed prospectus is sent to investors - 1/2 months before.
4. launch the stock and stabilise the price.

Question 9

What is an IPO syndicate?

Answer 9

This is when multiple banks are used to conduct a single IPO. Sometimes due to the size of the organisation or to reach more investors. When multiple banks are involved you have: global co-ordinators, book runners and placement. Comissions are 60,20,20. selling, book runners and co-ordinators/management.

Question 10

How is a stock typically stabilised?

Answer 10

This is typically done using over-allotment or greenshoe. Over-allotment involves a call option where the bank to request back some shares form the investors by over-allocating more than the company wanted to launch in the IPO. This is at a fixed share price, typically the IPO price. This is done to stabilise the markets. If the value of the stock is climbing too high, the bank can buy back the shares at a lower price and neutralize the short position. If the value of the stock falls they can buy back the shares from the investors at a profit and reinvest into the market to drive the price up.

Question 11

What are some of the other ways to raise equity?

Answer 11

Seasonal equity offerings - offering more shares of an already public company, this is quicker and with lower commission’s.
Private Placement - this is the quickest way, offer to institutional investors only, no public listing less time and due diligence required.

Question 12

What is the most important part of any IPO?

Answer 12

Not leaving a bitter taste in investors mouth in ensure repeat business.

Question 13

Is a higher price on an IPO always a good thing?

Answer 13

No, do not want to leave a bitter taste, allow investor profit, spark interest, get liquidity in the market, look at the long term goal, encourage investment and time in the market.

Question 14

What are debt capital markets?

Answer 14

This is the business of using debt such as bank loans and issuing bonds.

Question 15

What is the advantage of a bond over a bank loan?

Answer 15

• more control
• less regulated
• you set the pricing / typically cheaper than a bank loan
• work well at scale

Question 16

What is the disadvantage of a bond

Answer 16

• does not work for small cases
• has ancillary costs
• sufficient scale is required.

Question 17

What is a loan syndicate?

Answer 17

This is when a group of lenders collectively provide a loan. This is for governments and very large institutions.

Question 18

What is the role of an investment bank in deht raising?

Answer 18

1. manage
2. underwrite
3. sell

This is easier to price as moodys and S&P will give ratings correspondign to risk.

Question 19

What is the bond issuance process?

Answer 19

1. hire advisor
2. assemble a syndicate
3. credit rating adjacency
4. contact investors to decide: maturity, spread and IR
5. book building process
6. underwrite
7. stabilize

Question 20

What are junk bonds?

Answer 20

High yield bonds with a high default risk. lower quality, high interest rate,. loss of junk investment leads to a recession.

Question 21

What is securitisation and why is it used?

Answer 21

This is used to reduce the risk associated with a bank, using the capital adequacy ratio we can assess the risk of the bank. Packaging loans in a special purpose vehicle removes the risk from the bank to the investors and can clean the balance sheet.

Question 22

What is the capital adequacy ratio and what is it for?

Answer 22

bank capital / Real weighted assets.
bank capital consists of t1 and t2 capital.
The ways to raise this ratio is decrease risk and raise capital. securitisation is used to remove the risk and transfer it from the banks to the investors. The bank can package a group of risky assets into a special purpose vehicle. When the SPV is created the final step is to create the securities that are sold to the investors that typically have predetermined payments.

Question 23

What are Basel rules?

Question 24

What are asset backed securities?

Answer 24

These are securities often formed through a SPV, where the investors have a claim on the assets - the receivables from credit card loans for example.

Question 25

What are the advantages of SPVs for the bank and the investors?

Answer 25

investors: good ROI, diversification benefit - may not have direct access to residential mortgage markets.
bank: frees up assets on the balance sheet and can invest in new securities, profit from the origination and commissions of the loans in the SPV.

Question 26

what is a syndicated loan and what is its purpose?

Answer 26

A syndicated loan is a loan that cannot be fulfilled by a single bank but instead requires a group of banks. This is another form of diversification for the bank.

Question 27

Describe the full process of securitisation.

Answer 27

Consider you have credit card owners that the bank has leant to this is easy to statistically analyse, the % of bad debt is more or less known and the repayments are a stable cashflow.
This is often a constant business for a given bank.
1. provide a loan
2. package the loan into a security
3. get someone to manage the loan for a commission and get a credit rating.
4. sell these to investors
5. free up capital for new loans
6. reduce banks exposure, generating origination commissions, ease the banks capital adequacy ratio.

Question 28

What is project finance?

Answer 28

This is not financing for a whole business or firm but a specific project, this is often a good target for syndication. This uses a non/limited recourse financial structure.

The cash flows generated in projects are the only guarantee that the lenders have.

This uses an SVP financed with equity, massive contract of governance with a covenant.

lenders typically paid within 20/30 years. Lenders are satisfied first then dividends. The contract becomes like a company.

Lenders do not have claims for other assets owned by the project sponsor.

Usually infrastructure projects: power plant, hospital, airports, highways. Isolates the outcome of a given venture and stays off balance sheet.

EPC contract is typically required, specialized contractor to complete the whole project within a given time.

New asset class, higher interest and diversification.

Question 29

What are some example covenants?

Answer 29

positive covenants, things that must be done: include all issuances to protect assets.
negative covenants, that that cannot be done: dividends cannot be distributed for 5 years.

Question 30

What are the different types of bonds?

Answer 30

Asset based bonds - the investor has a claim of ownership of the underlying asset
Floating rate bonds - reverse rate + 3%
fixed rate bonds - set interest rate