New Issues - Corporate Underwritings

What happens in a western syndicate?

The responsibility and liability of the issue is broken up with each member responsible for only their particular piece of the issue. This is usually used for corporate underwritings.

What is a stabilizing bid?

Where the manager bids in the market at or just below the P.O.P. issue price, to make sure that the price doesn't fall below the initial offering price

What happens when an investment bank forms a syndicate around a bond issue?

It spreads the risk and the rewards among a number of investment banks

What are the prospectus delivery time windows?

25 days - if IPO or add-on offering of Exchange listed issue 40 days - If Add-on offering of Non-Exchange listed issue 90 days - if IPO of Non-exchange listed issue

How long can established issuers keep their registration on file on the SEC's Shelf? (Shelf Rule)

3 years - during which time they do not need to register with the SEC for any new issues nor do they need to wait during another 20 day "cooling off" period

Secondary offering

A company officer wishing to sell a large block of shares must include a prospectus and register with the SEC

All or none

A variation on the best efforts underwriting is a "best efforts - all or none." This type of underwriting is often used for start-up companies, where customer acceptance is unknown. The deal is contingent on the entire issue being sold; if only part of the issue is sold, the deal is canceled and prospective purchasers get their money back.

What is the formal agreement of the syndicate called?

Agreement Among Underwriters

What is a "Tombstone" announcement?

An announcement issued in the newspaper of a new bond being sold

Mini-maxi

Another variation of a best efforts underwriting is a "mini-maxi." This type of underwriting specifies a minimum amount that must be sold before the deal is "effective." If this minimum portion cannot be sold, then the deal is canceled. Therefore, on the "mini" portion, this is an "all or none" underwriting. Once the "mini" is reached, the underwriters will continue to sell the issue up to the maximum amount specified in the offering. This is the "maxi" portion of the deal, and this portion is handled on a simple "best efforts" basis.

Holding Company

Another way for a corporation to gain control over another company, other than an acquisition or merger, is to form a "holding company" that buys stock of other companies. The holding company acquires enough shares (though not necessarily a majority stake) to get some of its own representatives on that company's Board of Directors - thus it can influence that company's management policy and decisions.

Who is restricted from buying IPO's?

FINRA Member Firms, Officers, Employees And Immediate Family Fiduciaries To FINRA Member Firms Portfolio Managers Passive Owners Of Broker-Dealers

What are the types of underwriting commitments?

Firm commitment Best efforts All or none Mini-maxi Stand by

combined primary and secondary

If a company is planning a new issue of stock, it is common for officers to "piggyback" their shares onto the offering. Since the company is already going to spend the money to register the issue with the SEC, it is fairly inexpensive for the officers' shares to be included

What is the Market Out Clause?

If the "bottom" falls out of the market due to unforeseen events, the underwriters can be released from the underwriting under a "market out" clause included in the underwriting agreement.

Best efforts

In a "best efforts" underwriting, the investment banker agrees to act only as an "agent" in the transaction, using his best efforts to sell the issue, but takes no financial liability. If part of the issue is unsold, it remains with the issuer.

What happens in an eastern syndicate?

In an "eastern syndicate," the syndicate members share in the selling responsibility and liability as a group. The account is "undivided." This is the usual arrangement for municipal underwritings and is covered in the Municipal Underwritings section.

Leveraged Buy-out

Investment bankers can help arrange for the management and private investors to "buy-out" all of the public shareholders, in essence, taking the company private. The funds to acquire the publicly held shares are typically lent by a bank; hence the term "leveraged" buy-out.

Vertical Merger

Merger between 2 companies that are in different businesses

Horizontal Merger

Merger between 2 companies that are in the same business

P.O.P. stands for...

Public Offering Price

Divesture

Selling of a subsidiary away from a company

What do the members of the syndicate and selling group earn?

Spread Underwriters concession Selling Concession Reallowance

Stand by

The last type of underwriting commitment is a "stand by" underwriting. These are used when a company attempts to sell additional shares to its existing shareholders through a rights offering. If all the existing shareholders do not subscribe, the company will not achieve all of the additional funding that it desired. The company will have an underwriter "stand by" on a firm commitment basis to "pick up" the unsubscribed shares at the subscription price. The underwriter can then reoffer the shares to the general public.

Reallowance

The manager may allow a small discount to be given to firms that are not in the syndicate or selling group who want to buy the bonds

Firm commitment

The underwriter buys the full issue outright and earns the spread. The underwriter assumes full financial liability, because if part of the issue is unsold, or, if prices drop, the underwriter takes a loss.

What is the penalty bid clause?

This clause states that if the manager buys back too many shares (too many people "hitting the stabilizing bid") placed by any single syndicate member, that member loses his underwriter's concession on those shares.

primary offering

previously unissued securities being sold to the public for the first time.

What is "blue skying" the issue?

registering an issue with each state where the issuer wishes the securities to be sold

underwriter's concession

the profit that the managing underwriter concedes to the syndicate members