Investment Banking
7. Many investment banks have a principal investment group that invests directly in public and private companies. What conflicts of interest might arise from operating this type of business?
- Investment ideas can be shared internally first, so not all outside investors will have a fair chance - Prop trading can also partake in this transaction by betting one way or another to make a profit
6. Suppose you are a wealth advisor and a client has asked for your recommendation on which of the BRIC countries poses the least risk and most opportunity for investment growth. Briefly compare the perceived risks and benefits of each of the countries and provide support for your selection.
6 look in notes nobody ****ing knows .Brazil -Brazil's credit was upgraded in 2008 to Investment Grade status (BBB-) enabling foreign pension funds to investment in Brazil for first time -IPO's are usually used for already established family-run companies -Foreign investors accounted for over half of IPO sales leaving the local IPO market susceptible to changes in conditions outside of its control Russia -Most large companies doing IPOs list in both Moscow and London, giving the company higher international exposure to investors -Russian regulations seem ambiguous and repel some investors -IPO market concentrated in few sectors: finance, real estate and energy leaving the market subject relatively undiversified and subject to the volatility of those few sectors -In 2007, one company accounted for nearly half of the IPO market India -Mumbai and National stock exchanges became 20% owned by foreign exchanges such as NYSE and Deutsche Bourse in 2007, thus benefitting from their management and regulatory practices -India has large pool of savings to provide future IPO capital -Average deal size of $83 million is much smaller than Brazilian or Russian markets -Foreign investors account for ¾ of IPO capital leaving market susceptible to changes in foreign conditions -Indian companies required to list in India, but most dual list in US or London China -Largest market for IPOs in 2007 (including Hong Kong) -Average deal size of about $250 million includes a high number of mid-sized IPOs rather than just mega-deals -Many restrictions on foreign and domestic investors- Chinese citizens can't by shares in Hong Kong
4. Why did China institute an A-share B-share system? How has regulator easing benefited QFIIs?
A shares are only stock of chinese mainland companies B shares are stock for both domestic and foreign investors easier regulation helps because more international investors can trade in china
12. Provide reasons that an investment bank might give to support their advice that a private company should "go public."
Access to public market funding Acquisition currency and compensation vehicle Created liquidity for shareholders Enhanced profile and marketing benefits
3. What advancement in the mortgage market set the foundation for the subprime crisis and why?
Banks did not put mortgages on their books, securitized them, sold them in tranches, putting risk across the market. *Also they just gave out mortgages for the fees
14. How does a negotiated (best efforts) transaction differ from a "bought deal"?
Best effort- Issuer bears the risk Bought deal- IB bears the risk
Q1. When might an investment bank decline participation in an underwriting and why?
COMMITMENTS COMMITEE says its too risky
3. Disclosure of information to investors is another recurring theme in U.S. regulation of the securities industry. Provide examples of disclosure required by U.S. regulations.
Companies must give investors a prospectus -description of company's properties and business -description of the security to be offered for sale -information about the management of the company -financial statements certified by independent accountants
12. Of the major valuation methods, which one(s) are based on relative values? on intrinsic values? on ability to pay?
Comparative Company Analysis -use comparing companies in market to value Discounted Cash Flow (DCF) - use future cash flow to estimate current intrinsic value Leveraged Buyout (LBO) - buy company with all loans based on their assets so need companies business cycle and revenue to pay it off
What is a shelf registration
Filed with SEC that covers multiple different secutirites. Last for three years. Covers debt offerings, equity offerings, and convertible securities.
1. Following the 1929 stock market crash, Congress passed a series of Acts to regulate the securities industries. Name 4 of the Acts and briefly describe their purpose.
Glass-Steagall Act 1933 - separated commercial and investment banks, created the Federal Deposit Insurance Corporation (FDIC) Securities Exchange Act of 1934 - companies with >$10M in assets >500 investors must report annually. Created No insider trading The Chandler Act 1938 - added chapter X bankruptcies to the National Bankruptcy Act. Securities Act of 1933- securities must be registered w/ the SEC to prevent fraud.
4. In the United States, if an M&A transaction is relatively large within its industry, what is the name of the regulatory filing that is probably necessary before the transaction can be consummated? Which agency is it filed with? How long is the waiting period after a filing is made? What is the name of the European regulator that may be relevant in an M&A transaction?
Hart-Scott-Rodine, Department of Justice, 30 days, European Commision
4. Describe the function of the equity capital markets group, including the two major divisions they directly work with and the two types of clients they indirectly work with.
Help decide if an IPO is worth it based on the advantages Work w/ IB division and Sales & Trading Indirectly work w/ Institutional Clients and the Issuing Companies
18. Calculate the investment bank's fees and profit for a 5 million share equity offering at $40/share, with a 15% green shoe option (fully exercised) assuming a 2% gross spread, assuming the issuer's share price decreases to $38/share after the offering.
Investment bank buys 5 mill*0.15 = 750,000 shares at $38 (750,000*38 = 28.5 million) to deliver to short sale buyers. Company receives proceeds of 5 mill*$40 = $200 mill and issues 5 million shares. Bank's Profit = (750,000*40) - (750,000*38) = 1.5 million. Fee = 0.02*($200 mill) = $4 million.
10. What are some securities regulations in place in the United Kingdom, Japan and China that mirror U.S. regulations?
Japan - Similar to U.S. Glass-Steagall Act, Japanese regulators distinguished banks based on their business activities. Commercial banks were restricted from underwriting securities until 1999. In 2006, the Financial Instruments and Exchange Law which provides for registration and regulation of broker-dealers, disclosure obligations and internal controls in public companies. United Kingdom - Securities Investment Board (SIB) is similar to the SEC, financial firms have to register with the SIB. China - The Securities Law of 1998, there was a separation of banks engaging in deposit taking and securities activities.
2. List the three types of bank participants in an underwriting syndicate and their core responsibilities, in order of compensation received, from high to low.
Lead bookrunners of the transaction have the responsibility for determining the marketing method and the pricing Comanagers provide minor input to the bookrunners on marketing a pricing issues Selling Group for the offerings, who don't take any financial risk and receive even lower compensation.
2. Describe what a Chinese Wall is and which U.S. regulator would be concerned with issues involving the wall.
Legal seperation that proprietary traders and client traders cant talk. SEC
8. How do Asian and petrodollar investors fit into the genesis of the financial crisis during 2007-2008? Structure your answer around the themes of easy credit, excess liquidity and cheap debt.
Many asian investors had lots of money invested in US bonds. This comes up in Too Big to Fail when they say that one call to Russia and if they could take dow the american economy due to selling their bonds. BOOK: Rise of new power brokers and excess liquidity led to lower LT interest rates (easy credit), which led to lower cost of capital (cheap debt), which led to rising real estate prices and thus, the mortgage crisis
3. What precipitated the decline in CDO values during the 2007-2008 credit crisis?
Once mortgages declined, the CDO's that monoline insurers insured decreased in value. Then the insurers and securities were downgraded by moody's.
11. List the four principal alternative methods for establishing value in an M&A transaction.
Preemptive (1 buyer) Targeted Solicitation (2-5) Limited Auction (6-2-) Public Auction
Q3. Describe what Prime Brokerage is, including four principal products in this area and the generic name of the financial institutions that are targeted for this business.
Prime brokerage business focuses mainly on hedge funds and other clients who borrow securities and cash. Prime Brokerage is a special group of services offered to special clients, primarily dealing with lending securities for short positions. Four principal products in this area are securities lending, trade clearing, settlement, and performance measurement.
6. What are the objectives of Regulation FD? What are the concerns about this U.S.-based regulation?
Regulation Full Disclosure is to prevent from selectively disclosing stock moving information. Must disclose with SEC first Evens playing field for all investors
Q9. Suppose Company XYZ has an average daily trading volume of 1 million shares and shows a current short interest ratio of 3.0. It currently has a $100 million convertible outstanding that is convertible into 4 million shares. The hedge ratio on convertible bond is 55%, which means hedge funds investing in the security will sell short 55% of the shares underlying the convertible. Assume all investors in the convertible are hedge funds. Based on this information, estimate the adjusted short interest ratio that is a better representation of the current "bearish sentiment" on the stock.
Short interest = conv. shares * hedge ratio = 4mil * 0.55 = 2.2 mil Short interest ratio = short interest/ADTV = 2.2mil/1mil = 2.2
13. List six characteristics of companies that are good targets for an equity issuance.
Strong Stock performance Large insider holdings Hidden value Overly leveraged capital structure
4. Who within the investment bank is responsible for balancing these competing interests (issuers & investors)?
The Capital Markets Groups (work with both issuer and IB)
2. A goal of many parts of U.S. regulatory legislation has been to eliminate or minimize conflicts of interest between issuers, investment banks, and investors. Provide examples of conflicts of interest in the U.S. investment banking industry and the corresponding regulations that attempted to resolve those issues.
The Chandler Act 1938- prevent banks from wanting to be part of bankrupcies Securities Exchange Act of 1934- No insider trading Securities Act of 1933- No fraudulent securities Also chinese walls
8. Why was the Nikkei Put Warrant program so profitable for Goldman Sachs?
The Nikkei Warrant Put program was so profitable for GS because it had accurately estimated that future volatility of the Nikkei 225 Index would be higher during the delta hedging period than the implied volatility of the Japanese stock market at the time of the purchase of the Nikkei put warrants
9. What conflicts might exist as a result of having both an asset management business and a private wealth management business?
The PWM might direct the client to invest in their own AM fund, as they could be biased.
5. Under what scenarios will the SIV market arbitrage model fail to work?
The SIV market arbitrage model fails to work when faced with high liquidity.
5. How have the U.S. enforcement actions against sell-side research in 2003 heightened the issue of declining research revenues?
The compensation can not be based on the IB performance so less incentive for research
8. What conflicts might exist between the proprietary trading division and the rest of the investment bank?
Too much leverage Trading people's deposited money Use internal information
11. What are some major differences
U.S. U.K. Self-regulation prevailed until 1986, until the Securities and Investment Board (SIB) was created to be a comprehensive government regulator. Financial firms have to register with the SIB unless they are SRO's. The SRO's were given enforcement powers (fines, censures, bans). SIB became the FSA in 1997 and combined the powers of all 9 regulatory bodies into a single regulator for the industry, removing the influence of SROs. Like the SEC, FSA rules are binding without any Parliamentary Action. The U.K. is also subject to the EU banking and securities legislation as a member of the EU. China originally had two commissions in 1992, the State Council Securities Commission and the China Securities Regulatory Commission and the China Securities Regulatory Commission. The SCSC deal with centralized market regulation whereas the CSRC is the enforcer of the regulations. These two entities merged in 1998 and became a direct entity of the state council, the head council of the Central People's Government of China. Japan Pre-WWII Japanese banks were controlled by a Zaibatsu, a large conglomerate of businesses owned by a single holding company. Japan initiated the "Big bang" and began to deregulate the financial industry. They separated the Ministry of Finance and the Securities Exchange and Surveillance Commission and created the Financial Supervisory Agency which is the current securities regulatory body.
10. Assume a company's ADTV is 240,000 shares. How many days would it take to complete a 10.8 million share repurchase program? The company has 120 million shares outstanding and its estimated EPS for the current fiscal year is $3.40. Assuming the company meets its earnings estimate, what would year-end EPS be under an ASR program for the full 10.8 million shares, assuming it is executed 20 business days before the company's fiscal year end? And under an open market repurchase program?
a) 10,800,000 / (240,000*0.25) = 180 days b) (3.4*120M) / (120M - 10.8M) = $3.74 **** c c) (3.4*120M) / (120M - 240,000 *0.25*20) = $3.4
15. What are some methods used by investment banks to help equity issuers mitigate price risk during the marketing process?
accelerated offering- with a shorter road show block trade- where IB buys the shares and bears risk
what is the Gramm-Leach-Bliley act of 1999
brought banks back together
3. Why might a universal bank be better able to compete against a pure play investment bank for M&A and other investment banking engagements?
countercyclical business cycles More lending Fed Discount Window More Stable business cycle due to deposits Better internationally
2. Why are most corporate Eurobond issuers large multinational corporations?
it's a lot easier for multinational corporations to issue debt, and not have it tied to the regulations of the parent country.
9. What is ASR an abbreviation for? Describe this transaction and the principal benefit for a client. What additional benefit did IBM achieve in the ASR program described in this chapter?
you know this, just *IBM achieved an additional repatriation-related tax benefit in an ASR program.
