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CISI: Securities > Chapter 4: Primary Markets > Flashcards

Chapter 4: Primary Markets Flashcards

1
Q

What is a greenshoe, or over-allotment clause?

A

Enables companies to increase the number of shares offered at IPO.

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2
Q

What are the 3 broad stages to an IPO?

A

The decision
The preparation of the prospectus
The sale of securities

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3
Q

Who underwrites the offer?

A

Investment bank or banks that manage the sale

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4
Q

What is a “firm” underwriting?

A

Where there is a guarantee in place to purchase the securities

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5
Q

What is a “best-efforts” underwriting?

A

Where banks will do their best to sell the shares from the offering

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6
Q

What is the risk the underwriter may take on in a “best-efforts” underwriting?

A

If the IPO is under subscribed, they may suffer reputational damage - meaning less likely to be involved in future IPOs

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7
Q

What is a follow-on offering commonly referred to as?

A

Secondary offering

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8
Q

When would a company not do a secondary offering?

A

In a bear market

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9
Q

What are the 3 ways that a company can use IPOs?

A

Offers for sale
Placings
Introductions

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10
Q

What is an offer for sale?

A

Issuing company sells its shares to a issuing house (usually investment bank), who then take on the role at selling them to to public at a higher price

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11
Q

What is a fixed-price offer?

A

Price is usually fixed at just below where it is believed the issue should be fully subscribed

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12
Q

What is the benefit of a fixed-price offer?

A

Encourages an active secondary market

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13
Q

What is a tender offer?

A

Company sets a minimum tender price
Investors state the number of shares they wish to purchase and which price they are willing to pay

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14
Q

What happens when a tender offer closes?

A

A single settlement price is determined by the issuing house, and all applications at or above will be accepted at that price

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15
Q

Which offer type is more common?

A

Fixed-price

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16
Q

What is the benefit of tender offer over fixed-price?

A

More efficient way of allocating shares and maximising proceeds

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17
Q

What is the downside of tender offers?

A

More complex to administer

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18
Q

Where does the term greenshoe come from?

A

Green Shoe Manufacturing Company is 1919 was the first company to be permitted to do a over-allotment option

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19
Q

What does the over-allotment option allow underwriters to do?

A

Sell up to an additional 15% more shares if demand is in excess

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20
Q

How can the underwriter to support the stock price in case of adverse market conditions?

A

They can buy shares on the open market

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21
Q

What is a selective placing?

A

Company markets issue directly to broker/issuing house which in turn places the shares with selected clients

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22
Q

Why is a placing sometimes referred to as selective marketing?

A

Because the intermediary is selecting the clients on who to offer to

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23
Q

What is a private placement?

A

A placement offered directly to a restricted class of investors, known as “sophisticated, qualified or accredited”

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24
Q

Why are private placements not allowed to be offered to the public?

A

They have not filed a formal prospectus or offering document that is required by regulation to offer shares to regular investors

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25
What does a prospectus outline?
Details regarding the offering Detailed business plan How the proceeds will be used Director details Risks disclosure
26
What are the regulations for private placements in the UK, EU, US?
UK - Prospectus Regulations (reflect EUs regs) EU - Prospectus Directive (PD) US - Reg D
27
What is an introduction?
A direct listing of a company shares into a new secondary market A way of gaining liquidity by offering into a new market - e.g. ADR?
28
What is a hybrid instrument?
One that has characteristics of bonds and equities
29
What does an exchangeable bond offer to the investor?
Right to exchange the bond for a set number of shares, but the shares are not those of the bond issuer - but of another companies shares held by the issuer.
30
What benefits do exchangeable bonds offer to investors?
Safety of coupons and repayments, combined with the potential upside of equity growth
31
What benefits do exchangeable bonds offer to issuers?
Can raise borrowed funds more cheaply, as they are more attractive to investors
32
What is the negative of IPO to the company?
Loss of company control, higher disclosure requirements
33
How are exchangeable bonds similar to IPOs?
The offer can be underwritten by banks
34
What is a listing agent sometimes known as?
Sponsor
35
Who can be a listing agent?
Investment bank, stockbroker, financial services firm
36
What does a listing agent do?
Assessing company suitability for IPO Best method of listing Organising prospectus
37
What is the listing agent / sponsor known as in LSE's AIM?
Nominated advisor (nomad)
38
What do reporting accountants sometimes known as?
Public auditors
39
What do reporting accountants do?
Attest to validity of financial information provided in the prospectus
40
What is the origination team?
Corporate broker Acts as an intermediary between the company and the stock market, advises on market conditions
41
How would corporate governance be modified for an IPO?
Reducing the influence of a single individual Qualified financial director
42
What is a Syndicate Group?
Listing agent gathers together a syndicate of investment banks and institutional clients to market shares to their clients
43
When are Syndicate Groups used?
For large listings
44
What is a road show?
Marketing events held by institutions pitching IPOs to clients
45
What is the process of finding buyers for issuing company's know as?
Book-building
46
What is a lead manager
Manager taking responsibility of an area (geographical etc) in a Syndicate Group
47
How much can price ranges differ between different lead managers in a Syndicate?
10-15%
48
What is a book runner?
Lead managers who coordinate overall demand across a Syndicate
49
How does price finalisation occur in a Syndicate?
Syndicates will market shares at a price range, and price will be set based on demand
50
What is underwriting?
Contracts with financial institutions that guarantee share purchase if demand is insufficient Commonly at a discount to what is to be offered to the public
51
What is stabilisation?
Lead managers agreeing to support the price by buying in the secondary market if the price falls below a certain level
52
What happens to the shares purchased during stabilisation?
Sold into the open market over time
53
What does the FCA require during stabilisation?
Disclosure to investors that it is occuring
54
How else is stabilisation enforced?
Volatility circuit breakers Greenshoe options
55
What are the 3 major constituents for regulation in the LSE?
The law - UK Companies Act FCA LSE Rule Book
56
What does the FCA have to give before an exchange is allowed to be operated in the UK?
Recognition, becomes a recognised investment exchange (RIE) Lays down rules that have to be met before a company can be listed
57
What are the two stages of listing?
Prospectus documentation Application to stock exchange
58
What are the two markets on the LSE?
The Main Market AIM
59
What are the requirements for entering the main market?
Must be plc >£30m market cap 3 years books 10% of shares in public hands prospectus cannot issue warrants for more than 20% of share capital
60
Who do you have to appoint to enter the AIM?
Appoint two people Nomad - Nominated Advisor - exchange expert Broker, ensure sufficient liquidity
61
What is a supranational?
Global organisations, e.g. World Bank
62
What are agencies? (bonds)
Issue bonds for particular purposes, usually gov backed E.g. Fannie Mae
63
What is the most common pricing method for the DMO?
Auction
64
What are the two pricing methods for bond issuance?
Tender Auction
65
Who can bid on bond issuances?
GEMMs - Gilt-edged market makers
66
What happens if auction is not fully taken up?
DMO can take the gilts ono its own books
67
How does a tender offer work? Imagine the auction is for £1 million nominal and the minimum price is £100 for £100 nominal. The bids submitted are: * A offers to buy £0.5 million nominal, paying £101.50 for every £100 nominal. * B offers to buy £0.5 million nominal, paying £100.75 for every £100 nominal. * C offers to buy £0.5 million nominal, paying £100.50 for every £100 nominal.
* A offers to buy £0.5 million nominal, paying £101.50 for every £100 nominal. * B offers to buy £0.5 million nominal, paying £100.75 for every £100 nominal. * C offers to buy £0.5 million nominal, paying £100.50 for every £100 nominal. In this instance, A and B are awarded the gilts, but both pay the lower price: £100.75 (the highest price at which all the gilts could be sold).
68
What was introduced to allow companies to regularly issue bonds in the U.S.?
Shelf registration, allows companies to issue bonds over two years
69
What term have shelf registrations commonly been used for?
MTNs 2-10 years
70
What is it called when investors request bond terms from a company?
Reverse inquiries
71
What is pitching?
Investment banks interested in assisting in the issue will pitch to the issuer
72
What is the indicative bid?
Banks will detail their view during pitching on how much the issuer is likely to raise given the terms of the bond issue
73
What is the mandate announcement?
Issuer announces which bank(s) have been given the mandate to arrange the issue
74
What is a co-lead manager
Situation where lots of interest so a lead manager role is split out - maybe by geographical areas
75

CISI: Securities (10 decks)

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