Series 79: CH 9-- Syndication of Securities Offerings

breadth

# of syndicate members

Secondary Offering

- shareholders sell the shares among themselves & proceeds of the offerings belongs to the shareholder - transaction leaves the co's net worth unchanged

Standby Commitment Underwriting

-Occurs when additional shares are issued, & current shareholders have pre-emptive rights in a rights offering -underwriter will purchase for resale, any of the shares that aren't subscribed to shareholders

Split offering

-combo of a primary and a secondary offering -the corporation issues a portion of the stock offered, and existing shareholders offer the balance

Manager's fees, Underwriting fees, Selling concession

3 Components of the underwriting (gross) spread

Must have reasonable basis to believe (based on adequate due diligence) rec is suitable for at least some investors. Customer specific: Understanding how an investment is suitable for a given investor. Quantitative suitability

3 components of suitability

not considered a violation, because the rule requires information to be obtained before execution

A broker is involved in taking indications of interest for an IPO. The broker talks to a customer and assigns shares to the investor. One day before the effective date, the broker realizes she has not obtained the customer information required by the Suitability Rule. If the information is obtained that same day, this is

150,000 shares; $30

A common stock equity offering has a deal size of one million shares and a POP of $30. What is the max greenshoe that can be offered, and at what price can the shares be sold?

Selling Group

A large # of brokerage firms that join the originating i-bankers(s); each accepts responsibility for selling a certain portion of a new security issue on a commission basis, but perform no actual underwriting.

Minimum- Maximum underwriting

A type of best efforts underwriting where it will be canceled unless a min amount can be subscribed to (once the threshold is met, it becomes a traditional best effort offering)

option to expand # of shares offered based on demonstrated demand.

ABC Securities is the lead underwriter in the IPO of Bellwether Energy Corp. ABC believes there is sufficient public demand to offer 25 million shares at a range of $28-30 per share. However, other underwriters think offering 22 million shares would be less risky for the syndicate. What is the advantage of a greenshoe option in resolving this difference of opinion?

Jump ball pot arrangement

Allocation of sales credit to large institutions is on a first-come-first-serve basis, whoever gets the order first

Greenshoe Option

An IPO over-allotment option that allows for underwriters to issue up to 15 percent more of the underlying firm's stock, in the event the offering is well received by investors. § Can usually be exercised in part or in full o Can protect underwriters when they oversell a hot issue Would otherwise need to go into the market and buy shares at the market price to satisfy their clients demand

15%

An IPO over-allotment option that allows for underwriters to issue up to __________more of the underlying firm's stock, in the event the offering is well received by investors.

All or None Underwriting

An Underwriter agrees to try to sell all of shares offered, sales are contingent on all shares being issued. If shares cannot be sold, the deal is cancelled and any funds collected from investors returned.

bank, savings and loan, insurance co, registered investment co, investment adviser, any other entity w/ total assets of at least $50m

An institutional account is an account for.... (6)

By listing clients by sales rank, along with their familiar logos

An investment bank has been successful in leading underwritings for an impressive group of public company clients. How will the bank most likely highlight this information in its marketing materials?

request for proposal

An invitation by an issuer for underwriters to competitively bid for participation in an offering is known as a(n)

best efforts underwriting (has the lowest underwriting fees)

An issuer seeking to offer securities which incurring lower fees would seek what type of underwriting?

officers, directors and 5% or more beneficial owners

Andrea, who works in the investment banking department, has been asked by her boss to identify large shareholders of a public company that is about to have a follow-on stock offering. From SEC filings, which large shareholders can she identify?

Only if there is no investment banking business in the next three months.

As a broker for ABC Securities, Ted has the opportunity to allocate to his clients shares in an IPO his firm is underwriting. He wants to allocate 1,000 shares to a client who is the CEO of a firm that might decide to hire ABC for future I-Bing business. There has been no prior I-Bing relationship. Can Ted allocate these shares to curry goodwill with the CEO?

selling group

Comprised of B-Ds that sell an allotment of newly issued securities on behalf of an underwriter or syndicate members

no

Does, the greenshoe need to be exercised in whole?

Agreement Among Underwriters (AAU)

Establishes terms among the syndicate members, including appointing the managing underwriter, assigning allocations

Quid Pro Quo Allocations

FINRA prohibits member firms from engaging in activities referred to as quid pro quo or kickbacks. Firms may not use their allocations of new issues as a means of obtaining compensation that is excessive in relation to the services they are providing.

selling group members sell shares as agent only and don't purchase the shares

How does the selling group differ from the syndicate members in an underwriting?

the rep believes that the client can evaluate investment risk independently, the client indicates that it is exercising independent judgement in evaluating the recommendations

How is customer specific suitability met for Institutional accounts? ( Bank/ S&L/ insurance co./ registered investment company/ investment advisor/ entity with AUM > $50m) (2)

by primary dealers when purchasing government securities in Treasury auctions

In an underwriting, a competitive bid is generally used

Primary Offering

New shares available in a public offering that raise new capital and are dilutive in nature

no one

Once a deal is priced, who can purchase shares at a discount?

noon the next business day

Once a deal reaches the required threshold, when will an issuer client receive the proceeds from the sales of its securities?

Selected Dealer Agreement

Stipulates the terms for the selling group.

securities transactions, investment strategies

Suitability requirements apply to both recommended ________________________________ and _______________________________

negotiated underwriting

Terms of the offering are determined b/t the issuer and a single underwriter

underwriting proceeds

The price paid to the issuer to purchase the shares

bake-off

The process by which the firm going public in an IPO selects an underwriter for the IPO. Underwriters tell the firm about how they will produce the best results for the firm's IPO.

lock-up agreements

To protect against significant price fluctuations in newly issued stock, underwriters generally require that the co's mgmt/ other significant shareholders enter into a ___________________________ where they cannot sell the # of shares for a certain period of time Usually 180 days post completion of the IPO but can be longer

bond buyer

Tracks new bond issues coming to market

visit potential investors, distribute red herrings and FWPs, collect indications of interest (IOIs)

What are 3 key roles the syndicate desk performs during an underwriting?

it will be exercised when stock is trading above IPO price When exercised, the underwriter purchases shares from the issuer at the IPO price less the spreace

What are the mechanics of exercising a greenshoe?

red herring, tombstone

What documents may be used to market a deal prior to its going effective? (2)

Used to offset any syndicate short positions, Offered at the POP to unfilled customer orders using a random allocation methodology, Or sold on the secondary market with the profits anonymously donated to charity

What happens if shares trading at a premium are returned to the underwriter? (3)

block trade by an investor

What is a large risk for an underwriter executing a follow-on underwriting?

-IPOs of small companies: 10% to 15% -Investment grade bonds: 2% to 3% -Equity IPOs: 7%

What is a typical IPO spread?

15% of deal size

What is the max size of a greenshoe?

firm commitment

What is the most typical type of underwriting commitment?

to help maintain a stable share price and avoid negative perception of the co

What is the purpose of lock-ups?

participate in prep of underwriting docs

What would the syndicate desk not do?

must be held in escrow at a qualified financial institution (QFI)

Where can an underwriter hold the escrow proceeds prior to meeting the contingency?

only members of the syndicate, including selling group members, can purchase shares at a discount

Who is permitted to purchase shares at a discount to the offer price and earn the spread?

to increase sales channels and demand

Why would a lead underwriter engage a selling group?

secondary offering

a company registers to sell the shares of a director and private equity shop, but doesn't register any new shares

reasonable basis

a rep must have a ___________________________ to believe, based on adequate due diligence , that the rec is suitable for at least some investors

Firm Commitment

agreement w/ an i-banker who guarantees a sale of securities by agreeing to purchase the entire issue at a specified price and are therefore liable if they cannot sell the entire issue

2 business days

an underwriter must notify an issuer at least ____________________________________ before a lock-up period on that issuer's shares expires

contingency underwriting

both all-or-none and mini-max best efforts underwritings are referred to as this... This is bc a sales threshold must be met for the transaction to be confirmed

manager's fees

compensates the managing underwriter for negotiating and managing the offering (10-20% of the spread)

selling concession

compensates the managing underwriter, the syndicate member, or the selling group member for actually selling the shares (50-60% of the spread)

underwriting fees

compensates the syndicate members for assuming the risk if they cannot sell all the shares (20-30% of the spread)

crowding

competing issues coming to market at the same time

IPO calendars

compiled announcements of expected offering date and expected price range

Underwriting Spread

difference b/t what i-bank gets from selling securities to public investors (POP) and what they pay to issuing firm It increase w/ the amount of risk the underwriters take on

reallowance

even when a selling group member sells a share, a syndicate member might keep a small % of the selling concession

over-allotment option (greenshoe)

gives underwriters the right to offer more shares than the amount specified in the underwriting agreement

flipping

immediately selling IPO shares allocated thru the syndicate, usually on the first day of market trading

cold offering

in extreme cases of weak demand, the offering can be delayed or cancelled

Building the book

o Before an IPO becomes effective and orders are taken, this is a process to do a pre-market offering to qualified investors o The lead manager allocates the shares to the underwriters who then tries to ______________________________ through IOI (if they are not canceled, they are ordered when they security is effective Helps determine POP o Can use a red herring and a tombstone to market the offering before it is effective

directed orders

part or all of retention of shares above the allocation granted to other underwriters may be used as a "pot" for sale directly to large institutions

book-runner

pricing and scheduling decisions are usually the responsibility of the lead manager

quantitative suitability

requires an underwriter or a registered rep have a reasonable basis for believing that a series of recommended transactions is not excessive or unsuitable, even if all transactions (in isolation) are suitable

SEC Rule 15c2-4

requires that broker dealers participating in all or none or mini max offerings deposit investor funds in a separate escrow account at an independent bank or any other QFI for the benefit of the investors

rights offering

securities are offered exclusively to existing shareholders for a two-to-four week standby period

returned shares

shares that are allocated (circled) but not purchased by customers

suitability rules

solicitations of indications of interest usually accompany recs to purchase the securities being offered. These recs are subject to ____________________________

SEC Rule 10b-9

states that issuers and broker-dealers must be truthful with the public about the type of underwriting commitment

appropriateness

suitability refers to the _________________________________ of a rec to an investor

underwriting agreement

terms and conditions of the public offering & agreement b/t the issuer & underwriter are formalized in a contract

used to offset any syndicate short positions, offered at the POP to unfilled customer order using random allocation methodology, sold on the 2ndary market w/ profits donated to charity

the AAU in an IPO must require that shares trading at a premium that are returned by a purchaser to a syndicate member after trading begins be... (3)

Spinning (in building the book)

the act of offering preferred customers shares in an initial public offering by a brokerage firm or underwriter in order to keep or obtain their business.

spinning allocations

the allocation of new shares to officers, directors, or other senior mgmt of i-banking clients (past 12 months or expected to in next 3 months)

fixed pot allocation

the allocation of sales credits on "pot sales" is predetermined among the underwriters and doesn't depend on who originates institutional sales

issuer-directed allocation

the issuer directs sales to any of those individuals w/o influence from the underwriter

customer-specific suitability

the know-your-customer process

public offering price (POP)

the price the public must pay to purchase the securities

takedown price

the syndicate members purchase the securities from the managing underwriter at ___________________________

Best Efforts Underwriting

type of underwriting in which underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer w/o financial responsibility. has lowest underwriting fees

upsize the deal

underwriter could increase the # of shares sold prior to the effective date

competitive bid process

underwriters submit sealed bids to the issuer to sell the securities

Full takedown (underwriting concession)

underwriting fee and selling concession, together

syndicate desk

w/in a b-d, tasked w/ marketing, selling, and possibly, stabilizing the new issue

fractioned

when an allocation is granted to an underwriter