Primary markets

Question 1

Stages of an Initial Public Offer

Answer 1

• Decision
- Appointment of an underwriting firm
- Creation of origination team
• Preparation of prospectus
- Marketing to investors
• Prospectus
• A prospectus is a detailed document providing potential investors with the information required to make an informed decision on the company and its shares. It is required whenever a company issues securities in order to raise capital from the public.
• Sale of securities

Question 2

Listing advisers origination team

Answer 2

A range of advisers working with the lead manager to help the company place its new issue of shares/bonds:
- Sponsor (listing agent)
• Assesses the company’s suitability for listing
• Assesses the best method of bringing the company to market
• Co-ordinates the production of the prospectus
- Legal advisors
• Ensues all relevant matters are covered in the prospectus
- Public relations
• To created a positive perception of the company
- Accountants
• Validates the financial statements in the prospectus
- Corporate broker
• The interface between the company and the market
• Advises the company on current market conditions
Legal advisers and reporting accountants provide due diligence for the prospectus.

Question 3

Underwriting firm:

Answer 3

helps a company determine what type of security to issue, the best offering price and the time to bring it to the market, and acts as sponsor/advisor for the issuance of securities.

Question 4

Lead manager:

Answer 4

(usually an investment bank) a firm who is given the responsibility to co-ordinate the
issuance of securities through a syndicate. Generally the sponsor.

Question 5

Co-manager:

Answer 5

A firm who has been appointed by the lead manager to assist in the issuance.

Question 6

Co-lead manager:

Answer 6

– firms who have been given joint responsibility to coordinate the issue of securities and are usually in different geographical areas

Question 7

Issuing house:

Answer 7

– (usually an investment bank) invites applications from the public at a slightly higher price than the issuing house has paid the issuing company through an offer document.

Question 8

Bookrunner:

Answer 8

a firm who is given the role to co-ordinate the overall level of investor demand. Typically the lead manager.

Question 9

Underwriter:

Answer 9

a firm, or syndicate of firms, who guarantees a minimum level of proceeds from a share issue.

Question 10

Purpose of underwriting:

Answer 10

• Means of guaranteeing a minimum level of proceeds from a share issue
• Used in all situations where share issues are generating proceeds (‘marketing operations’)

Question 11

Stabilisation:

Answer 11

Stabilisation is the process where a lead manager in an issue purchases stock in the secondary market in order to support the price of the issue.
Regulations typically require clear disclosure of stabilisation to the market.

Question 12

Fixed price offer:

Answer 12

Where the price is fixed just below a point at which it is believed there would be full subscription, to encourage an active secondary market.

Question 13

Tender offer:

Answer 13

Book building process where minimum price is set and investors respond with prices and volumes they would be prepared to pay.

Question 14

Placing for qualified investors

Answer 14

Selective marketing technique: cheaper than offer for sale.
Small investors would not be offered shares in a placing. Institutions and wealthy individuals would be offered shares in a placing.
A company obtains a listing without issuing new share capital

Question 15

Listing without a prospectus

Answer 15

Offerings made to the general public typically require a prospectus.
Issuers are exempt from the obligation to produce a prospectus where offers made are to sophisticated or qualified investors.

Question 16

Types of bond issuer:

Answer 16

Governments, supranational, municipal, agency, special purpose vehicles, corporate. Municipal bonds are attractive to many investors because the interest income is exempt from federal income tax, and in many cases, state and local taxes.

Question 17

Agency bonds

Answer 17

Some government sponsored entities also issue bonds. As they are backed by the government, they are considered safe investments.
In the US, examples include:
• Government National Mortgage Association (Ginnie Mae)
• Federal Home Loan Mortgage Corporation (Freddie Mac)
• Federal National Mortgage Association (Fannie Mae)
• Student Loan Marketing Association (Sallie Mae)

Question 18

Government issues

Answer 18

• UK Government gilts: Issue – Debt Management Office (DMO)
- Competitive: Bids for ≥ £1,000,000 nominal
• French and German Government auction – bid pricing system
• US Government Auctions – tender style (single price auction)
- The United States Department of the Treasury – Federal Reserve

Question 19

Non-competitive bids

Answer 19

Governments may issue a smaller tranche of the debt using a non-competitive process. Non-competitive bids are allotted at the weighted average price of the accepted price bids.

Question 20

Corporate issues

Answer 20

• There is typically a need to raise debt capital regularly to fund developments in the business
• This can be done through
- Scheduled programmes
• Arrangement with a bank to borrow money rather than issue bonds
- Shelf registration
• Single registration covers multiple issues
- Up to two years
• Typically used in US with medium-term notes (MTN)
• Sometimes companies may issue MTNs in response to client requests
- Reverse enquiry

Question 21

The stages of a typical bond issue include some or all of the following:

Answer 21

• Pitching: investment bank(s) interested in managing the issue make a pitch – a presentation to the issuer.
• Indicative bid: an indication given by the investment bank to the issuer
regarding how much the bond issue might raise.
• Mandate announcement: the announcement of the bank(s) given the mandate to manage the bond issue.
• Credit rating: the investment bank will try to obtain a favourable credit rating for the issue from a rating agency. The success of the issue and the interest rate required by investors depend on the credit rating of the bond.
• Roadshow: a series of meetings with potential investors and brokers, conducted by a company and its underwriter, to market the issue.
• Listing
• Syndication

Question 22

Bought deal:

Answer 22

The lead manager of an issuer buys a whole issue at a predetermined price and then places the bonds with its own clients.

Question 23

Fixed price re-offer:

Answer 23

The lead manager of an issue distributes bonds to the management group who then place bonds on with their clients. Not permitted to place bonds at a price below fixed price agreed in advance until the syndicate is broken.

Question 24

Placing:

Answer 24

an issue where the issuing house places the shares directly with its own client base rather than inviting applications for the shares from outside third parties.

Question 25

Greenshoe / over-allotment option:

Answer 25

Over-allotment option (or Greenshoe option) refers to the ability for a lead manager to call for more shares to issue during an IPO.

Question 26

Listed companies must produce audited accounts at least:

Answer 26

Yearly.

Question 27

Best efforts:

Answer 27

Best efforts basis refers to when the underwriters try to do their best to sell the securities at a certain price.

Question 28

Agency bonds:

Answer 28

Sallie Mae issue agency bonds. Freddie Mac, Fannie Mae and Ginnie Mae are the other agencies that would be associated with issuing agency bonds

Question 29

Syndicate members:

Answer 29

Lead manager, co-manager, co-lead manager, issuing house, bookrunner, underwriter.

Question 30

Each competitive gilt bid must be made for a minimum of £1,000,000 nominal value

Answer 30

However, UK Debt Management Office cannot force GEMMs to take up all gilts in an auction.