Primary Markets

Question 1

what are the key advantages of an IPO?

Answer 1

can raise substantial sums of capital and create a great deal of publicity for the issuing companies

company assets aren’t encumbered or hypothecated in the same manner as they would be if capital was raised from debt offering

Question 2

what is an IPO?

Answer 2

Initial public offering of a companies shares to investors.

Question 3

what are the three braod stages of an IPO?

Answer 3

• decision to go public
• preparation of the prospectus
• sale of securities

Question 4

what is underwriting and who is responsible?

Answer 4

generally the responsibility of the investment banks , guarantee in place to buy securities . also can be on a ‘best effort’ basis where the bank will do their best to sell shares involved in the offering but no formal guarantee

Question 5

what is a follow-on offering?

Answer 5

secondary offer, considered if the equity markets are sufficiently robust

Question 6

how is a follow-on offering structured?

Answer 6

structured with a base number of shares that the company is planning to use. quicker, easier and cheaper than an IPO as they’ve already been through the stages of the IPO.

Question 7

what are the 3 broad stages of a follow-on offering?

Answer 7

• decision
• preparation of the prospectus
• sale of securities

Question 8

what are offers for sale?

Answer 8

most common way of achieving a listing. company seeking listing approach an issuing house (IB) that specialises in approaching potential shareholders and preparing the necessary documentation

Question 9

how does an offer for sale work?

Answer 9

issuing company sells shares to the issuing house who will then invite applications from the public at a slightly higher price than they paid.

Question 10

what is contained in the offer document/prospectus?

Answer 10

provides comprehensive information about the company and its directors how proceeds from the share issue will be applied

Question 11

how are shares released as part of an offer-for sale?

Answer 11

don’t necessarily require the company to create new shares specifically for the share issue, founders can release part or all of the equity stake in their company

Question 12

what is a fixed-price offer?

Answer 12

price is usually fixed at just below that at which it’s believed the issue should be fully subscribed, encourage an active secondary market. If it is oversubscribed, shares can be allotted by scaling down each application or by satisfying randomly chosen proportion of the application in full.

Question 13

what is a tender offer?

Answer 13

used to reduce the importance of judging demand required and setting the price at a level that doesn’t lead to the issue being excessively oversubscribed- no fixed price stipulated, invites tenders for the issue with a minimum tender price set

Question 14

what does the ‘green-shoe’ provision allow?

Answer 14

underwriters of the IPO can sell up to an additional 15% of the original number of shares. used as a stabilisation tool if the demand for securities is in excess of the initial amount offered

Question 15

what is a placing?

Answer 15

where an issuer markets the issue directly to a broker, issuing house who will then place the shares with selected clients, least expensive- used for IPOs and follow-on offerings

Question 16

what is a special provision?

Answer 16

when the offering is marketed to a restricted class of investors (sophisticated or otherwise).

Question 17

what is an introduction?

Answer 17

not actually an issue, common in emerging market exchanges, used when a company doesn’t need to raise capital through share-issue but needs the extra liquidity that being listed provides.

Question 18

what is the use of a convertible/exchangeable bond offering?

Answer 18

enables issuer to raise borrowed funds more cheaply, structure of offering mirrors that of equities

Question 19

what is the role of a listing advisor?

Answer 19

will include a listing agent at the IPO stage and a corporate broker to act for the company at the IPO and afterwards.

Question 20

what is the role of a sponsor?

Answer 20

assess the company’s suitability for listing, the best method of bringing the company to the market and coordinating production of the prospectus

Question 21

what is the role of reporting accountants?

Answer 21

attest to the validity of a company’s financial statements and information provided in the prospectus.

Question 22

what does the origination team do?

Answer 22

act as an interface between the issuer and investors, advises the company on market conditions.

Question 23

what is underwriting?

Answer 23

agreeing with FIs that if demand is insufficient, the FIs will buy the remaining shares- insurance policy, they will purchase the shares at a discount to the market rate. will be paid fees for taking on the risk of the shares lack of demand

Question 24

how does the stabilisation process work?

Answer 24

the lead manager in the syndicate will agree to purchase the shares back from the market and support the price if the share price falls below a certain predetermined level. could also use the green shoe option if demand is very high. makes issuing companies shares seem less volatile.

Question 25

what is the role of stock exchanges?

Answer 25

to facilitate the secondary market trading of securities, determine rules around subsequent trading

Question 26

what are the requirements to be listed on the LSE Main Market?

Answer 26

• must be represented by a sponsor
• market cap. of at least £30m
• at least 10% of shares should be in public hands
• must publish prospectus
• warrants can’t amount to more than 20% of issued share capital
• they must pay an appropriation fee

Question 27

what are the requirements to be listed on the LSE AIM?

Answer 27

• no restriction on market value
• need to have a nomad
• need to have a broker

Question 28

what are the different types of entities that can issue bonds?

Answer 28

• supranational
• governments
• agencies
• municipalities
• corporates
• financial institutions/SPVs

Question 29

what is a ‘shelf-registration’ in relation to bond issuances?

Answer 29

enables a single registration for multiple bond issues over a period of up to 2 years, used in the MTN market. issuer will use this to issue bonds when money is required.

Question 30

what are reverse inquiries?

Answer 30

where clients will issue an enquiry to dealers that want a particular maturity and coupon and the issuer can decide whether to accept the terms of condition or not.

Question 31

what are the stages of a new bond issuance?

Answer 31

• pitching
• indicative bid
• mandate announcement
• credit rating
• roadshow
• listing
• syndication