Unit 2 - 4. Primary Markets

Question 1

Types of Offer (IPO/FPO)

Unit 2 - 4. Primary Markets

Answer 1

IPO - initial public offering
Issues new stock to the public for the first time. Can raise substantial sums of capital.
An IPO is usually structured with a base number of shares that the company is planning to issue. Option to increase this referred to as a greenshoe option or an over-allotment clause. Underwriting, usually by an investment bank, is guaranteeing to buy the securities.

stages

• the decision
• preparation of the prospectus
• sale of securities

FPO - Follow on Offering
An already listed company raises more capital through an FPO by issuing new shares.

Question 2

Types of Offer (offer for sale, over allotment options, placing (selective marketing)

Unit 2 - 4. Primary Markets

Answer 2

Offers for sale - Typically no new funds are raised. Doesn’t require new shares to be issued, usually the transfer of private ownership via the primary markets. Existing shareholders dilute their ownership. Can be combined with an IPO. Two types of offers.

Fixed price offer - price usually fixed just below that at which it is believed the issue should be fully subscribed.

Tender offer - offers for sale made on a tender basis when the issuer does not stipulate a fixed price but invites tenders for the issue, can set a minimum tender price.

Over-allotment options = common over-allotment provision is the greenshoe. Gives underwriters of an IPO the right to sell up to an additional 15% pf the original number of shares at the IPO price if demand is excessive.

A placing (sometimes called selective marketing) is issuing new shares which are sold directly to select financial institutions.

Introduction is placing shares on a secondary market without raising any funds, used in developing markets.

Question 3

Participants in an Equity Offering Securities

Unit 2 - 4. Primary Markets

Answer 3

Sponsor (listing agent) = investment bank (or similar) part of the origination team helping the company in the flotation.

For large listings, sponsor will get together a syndicate of investment banks/stockbrokers to market the share issue to their clients.

Sponsor will generally act as the lead manager of the syndicate, appointing a host of co-managers to assist.

Process of finding buyers is called bookbuilding, lead manager coordinates the overall level of demand across the syndicate, called the book runner.

Underwriters = if demand is insufficient, the financial institution will buy the shares, basically an insurance policy on the issue. Underwriters paid fees regardless.

Stabilisation = lead manager of the issue agrees to support the price by buying back the newly issued securities in the market if they fall below a defined price. Reduces volatility. There are strict rules for stabilization practices, UK requires disclosure. Prices can be stabilized by circuit breakers.

Question 4

Stock Exchanges

Unit 2 - 4. Primary Markets

Answer 4

Basic role is to facilitate the secondary trading of listed securities.

All exchanges have their own regulatory framework.

• determine which securities can be traded
• regulation for subsequent trading of those securities

Admission Criteria for Listing

• first stage = filling of prospectus with the regulator, who makes it public
• second stage = application to the stock exchange to have the security traded.

Common to have split markets, a major market and a junior market. (UK, official list and AIM)

Sometimes junior market has less strict listing criteria.

Question 5

Bond Offering

Unit 2 - 4. Primary Markets

Answer 5

Bonds are IOU instruments that specify a face value, coupon rate and redemption date.

Issuer by

• supranationals
• governments
• agencies
• municipalities
• corporates
• financial institutions and SPVs

self registration introduced flexible bond market issuance.

new bond issuance

1. pitching
2. indicative bid
3. mandate announcement
4. credit rating
5. roadshow
6. listing
7. syndication

Question 6

Bought deal, Fixed price re-offer, Book building, Placing

Unit 2 - 4. Primary Markets

Answer 6

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

Fixed price re-offer - the lead manager of an issue distributes bonds to the management group who then place the bonds on with their clients. They are not permitted to place the bonds at a price below the fixed price agreed in advance until the syndicate is broken.

Book building - prior to the issue of shares, an issuing house conducts a bookbuilding exercise where it contacts investors and obtains commitments to purchase a number of shares at a specified price. Having established the demand for the shares over a two week period or so, the issuing manager sets the fixed price for the issue in line with the demand levels that have been established.

Placing - 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.