Volume 1- Chapter 12 Flashcards
What is the financing process used by governments and corporations to raise capital?
Also known as underwriting, it involves issuing debt and equity securities through various methods.
How do governments typically raise capital?
Through an auction process or a fiscal agency.
What is public financing?
It is undertaken by public companies that trade on exchanges and over-the-counter (OTC) markets.
What role does the finance department of an investment dealer play?
Acts as an intermediary between investors and issuers of debt and equity securities.
What are the two distinct groups in an investment dealer’s finance department?
- Government finance
- Corporate finance
What is the primary focus of the government finance department?
Selling debt instruments and advising clients on debt issues.
What factors must be considered in government finance?
- Size of the issue
- Coupon (interest rate)
- Currency of denomination
- Timing of the issue
- Domestic or foreign issue
- Market impact
- New maturity or reopening previous issue
What is corporate financing?
A balancing act between corporate client needs and those of the investing public.
What factors are considered in corporate financing?
- Types of securities
- Timing to market
- Private or public offering
- Proportion to institutional and retail investors
- Pricing
- Coupon rate or valuation multiple
- Underwriting fee
How does the Canadian Government issue new bonds?
Through a competitive tender system via regular auctions.
Who can submit bids for Canadian government securities?
Only institutions recognized as government securities distributors.
What is a primary dealer?
A government securities distributor maintaining a certain threshold of activity.
What is the difference between competitive and non-competitive bids in bond auctions?
Competitive bids specify yield and size, while non-competitive bids are accepted in full at the auction average yield.
What is the role of a fiscal agent in provincial and municipal bond issues?
To negotiate prices and manage the issuance process.
What are direct bonds and guaranteed bonds?
- Direct bonds: Issued in the government’s name
- Guaranteed bonds: Issued by a crown corporation, guaranteed by the provincial government
What is equity financing?
Raising capital by selling common shares to investors.
What are authorized shares?
The maximum number of shares a corporation may issue under its charter.
What is the public float?
The portion of outstanding shares that are freely available for public trading.
How does outstanding shares affect market capitalization?
Determines the total dollar value of the company based on the market price of issued shares.
What are mortgage bonds?
Debt securities backed by a specific pledge of assets.
What are debentures?
Debt securities backed only by the general creditworthiness of the corporation.
What is the dealer’s advisory relationship with corporations?
The dealer provides advice on timing, amount, pricing, and distribution of securities.
What is a due diligence report?
An assessment of a corporation’s position, financial record, structure, and risk factors.
What considerations guide a dealer’s recommendation for issuing securities?
Current market conditions, investor preferences, and impact on existing capitalization.
Fill in the blank: Bonds have a _______ interest rate than comparable debentures.
lower
True or False: A corporation’s public float includes shares held by company officers.
False
What are the advantages of issuing bonds?
- Lower interest rate than comparable debentures
- Marketable to institutions requiring debt issues secured by assets
What are the disadvantages of issuing bonds?
- Less flexible due to asset pledging
- Can be problematic in mergers due to asset pledges
- Requires regular interest payments, omission leads to default
What are the advantages of issuing debentures?
- Flexible due to absence of specific pledges
- Lower cost at issue, no asset registration
- Higher coupon rate potential than comparable bonds
What are the disadvantages of issuing debentures?
- Requires regular interest payments, omission leads to default
What are the advantages of issuing preferred shares?
- Considered equity, allowing stable debt-to-equity ratio
- Non-payment of dividends does not trigger default
- Greater financing flexibility due to lack of asset pledge
What are the disadvantages of issuing preferred shares?
- Limited lifespan due to redemption options
- High issuance costs due to after-tax dividend payments
- Non-payment can trigger voting privileges for preferred shareholders
What are the advantages of issuing common shares?
- No obligation to pay dividends
- No capital repayment required
- Larger equity base supports more debt
What are the disadvantages of issuing common shares?
- Equity dilution for existing shareholders
- Dividends more expensive than interest
- Higher underwriting discount compared to debt issues
What is the purpose of protective provisions in bond issues?
To safeguard the position of the security holder against financial weakening of the issuer
What is a private placement?
An offering where the entire issue is sold to one or several large institutional investors
What is a primary offering?
The initial public offering (IPO) where a corporation issues shares to the public for the first time
In a best efforts underwriting agreement, what is the dealer’s role?
Acts as an agent and makes best efforts to sell the securities; unsold securities are returned to the issuer
What is a firm commitment underwriting agreement?
The underwriter acts as a principal, committing to buy a specified number of securities at a set price
What is a treasury share?
Repurchased shares that do not have voting rights or dividend entitlements
What is the prospectus system?
A regulatory framework ensuring full disclosure and safeguards for public offerings of securities
When is a prospectus required?
When the offering or sale of securities is deemed a distribution to the public
What is a preliminary prospectus?
An initial document filed that outlines the intended offering and is subject to completion or amendment
What is the Passport System?
A system allowing issuers streamlined access to the capital markets in multiple jurisdictions
What activities can underwriters engage in during the waiting period after a preliminary prospectus is issued?
Solicit expressions of interest from potential purchasers
Fill in the blank: Bonds are considered _______ securities.
debt
Fill in the blank: Preferred shares are considered _______ securities.
equity
True or False: A primary offering can only occur if a corporation is issuing shares for the first time.
False
What is the period between the issuance of a receipt for a preliminary prospectus and receipt for a final prospectus called?
Waiting period
What activities are permitted during the waiting period?
Soliciting expressions of interest and providing preliminary prospectus to interested parties
What is prohibited during the waiting period?
Encouraging a trade, such as executing an agreement to purchase the security
What must a final prospectus contain?
Complete details of the securities offered, including full, true, and plain disclosure of all material facts
What constitutes a material fact in a final prospectus?
Information that can significantly affect the market price or value of the securities
What must accompany the final prospectus as evidence of compliance?
Written consent of experts whose reports or opinions are referred to in the prospectus
What is a market out clause?
A provision allowing the underwriter to cancel an offering without penalty under certain conditions
What is the purpose of the short form prospectus system?
To allow certain securities issuers quicker access to capital markets
Under what conditions can an issuer use a short form prospectus?
Must electronically file using SEDAR+, be a reporting issuer, have filed current annual financial statements, not be inactive, and have equity securities listed
What types of offerings always require a long form prospectus?
IPO, offering by an inactive issuer, and offering for financing a material change
What is after-market stabilization?
The process where the lead dealer supports the offer price of a stock once it begins trading
What is the Greenshoe option?
Allows the dealer to issue 15% more shares than originally planned
What is a penalty bid in after-market stabilization?
A penalty imposed on dealers if their customers sell shares during or shortly after the distribution period
What is a stabilizing bid?
A bid posted by the dealer to purchase shares at a price not exceeding the offer price
What is required for a prospectus when shares are distributed through the TSX Venture Exchange?
Must meet requirements of both the exchange and applicable national instruments
What is crowdfunding?
The process of raising start-up capital by soliciting contributions from the public, usually online
What are junior company distributions?
Distributions of treasury shares by junior companies to raise capital
What are escrowed shares?
Shares held by an independent trustee that cannot be sold or transferred without special approval
What is the Capital Pool Company (CPC) program?
A program that allows emerging businesses to obtain financing earlier than a traditional IPO
What is the NEX board?
A trading forum for companies that have fallen below the TSX Venture Exchange’s listing standards
Fill in the blank: A final prospectus must provide full, true, and plain _______ of all material facts.
Disclosure
True or False: The underwriter can execute an agreement to purchase the security during the waiting period.
False
What information must be included in the cover page of a prospectus?
Value of the offering, payment to stakeholders, market out clauses, and prospectus status
What must be done within 24 months of a CPC IPO?
Identify an appropriate business and issue a news release about the agreement
What is the purpose of a listing application for a company?
To obtain detailed information about the company and its operations
The application form is a lengthy questionnaire.
What must a company do after completing the listing application?
Sign a formal listing agreement
The agreement details specific regulations and reporting requirements.
List three specific regulations a company must comply with after signing a listing agreement.
- Submit annual and interim financial reports
- Notify the exchange about dividends or distributions
- Notify the exchange of material changes in the company’s business
What is one advantage of being listed on a major exchange?
Enhanced company prestige through increased public visibility
Shareholder goodwill increases as trading becomes easier.
What is a disadvantage of being listed on a major exchange?
Need to keep market participants informed
Management must spend time communicating with analysts and investors.
True or False: The market value of a listed company is readily visible.
True
What are the three types of temporary withdrawals of trading privileges?
- Delayed opening
- Halt in trading
- Suspension in trading
What is a delayed opening in trading?
A temporary delay ordered by an exchange shortly before trading begins
It helps organize buy and sell orders.
What might cause a temporary halt in trading?
Significant news such as a pending merger or a substantial change in dividends or earnings
What happens during a suspension in trading?
Trading privileges can be suspended for more than one trading session
Trading resumes if the company rectifies the issue to the exchange’s satisfaction.
List two reasons a security might be delisted.
- The company is without assets or has gone bankrupt
- The company has failed to comply with the terms of its listing agreement
Fill in the blank: A security can be ________, meaning that its listing privileges are permanently cancelled.
delisted
What is one benefit of strict exchange disclosure regulations for investors?
Investors have access to more information on a regular basis
What must a company do regarding stock options after listing?
Certain restrictions are put in place regarding stock options issued for internal use only
What are the additional costs a company faces when listed?
Listing fee and subsequent annual sustaining fee
True or False: Delisting is a temporary action taken by the exchange.
False
