The Underwriting Process

Who is an underwriter?

An Investment Bank

Underwriter Considerations:

Determines whether to sell stocks or bonds - least cost Tax consequences Money market Financing Capital Market financing

Mini Max (Best Efforts)

A minimum dollar amount is agreed upon. If that much is sold, the underwriter can then sell the Max

Participants in a Corporate New Issue

The Issuer and The Undewriter

Competitive Bidding Underwriting

The Syndicate if first assembled, then members work together to arrive at the bid. Common for municipal securities

Market-Out Clause

The Underwriting Agreement specifies conditions under which the offering may be cancelled

Underwriting agreement

The contract that establishes the relationship between the issuer and the underwriters. Sets the rights and obligations of both.

Underwriter Compensation

The difference between the POP and the spread

Negotiated Underwriting

The syndicate may be formed after the issuer and the underwriting manager have negotiated the terms of the offering.

Best Efforts Underwriting

Underwriter acts as agent not as principal. If they can't sell the issues, they are not liable

Firm Commitment

Underwriter commits to selling all unsold securities (It's Syndicate responsibilities depends on the Agreement Among Underwriters and whether they went Eastern or Western)

All or None (Best Efforts)

Underwriter either sells all or none - no obligation. Funds remain in escrow until all are sold. Returned if not.

Standby Underwriting Commitment

When a company's current stockholders do not exercise their preemptive rights in an additional offering, a corporation has an underwriter standing by to purchase whatever shares remain unsold.

Underwriting Manager

AKA a Syndicate Manager. Directs the underwriting process for the smallest percentage of the spread

Agreement Among Underwriters

Details each underwriters's commitment and liability, particularly for an y shares that remain unsold. (Western or Eastern Underwriting)

Issuers responsibilities

Filing Reg. Statement with SEC Filing Reg. statement with the state in which it will sell Negotiating the securities price and amount of the spread

Selling Group

Make be formed to help sell the security. In exchange, they get a part of the spread known as the concession (generally the largest % of the spread). They have no obligation to buy if the issue does not get sold.

The Spread (Corp)

Manager's fee Underwriting fee (All syndicate members get) Selling concession (Anyone who sells gets this)

Syndicate Members

Members of the Underwriting group who make a financial commitment to bring the securities public. They sign the Syndicate agreement