Chapter 4 (Primary markets) Flashcards
(105 cards)
1
Q
What is an IPO, and why is it significant for a company?
A
An IPO (Initial Public Offering) is the first sale of a company’s shares to the public. It allows a privately owned company to raise substantial funds, gain public visibility, and access new investors, but it also involves giving up some control due to voting rights of public shareholders.
2
Q
What are the advantages of an IPO over other capital-raising methods?
A
IPOs raise substantial sums of capital, create publicity for the company, and provide risk capital without encumbering assets, unlike debt offerings.
3
Q
What are the risks associated with an IPO for the original owners?
A
Original owners may lose control over the company as public shareholders gain voting rights and the ability to trade shares in the secondary market.
4
Q
What is the structure of a typical IPO?
A
An IPO typically involves a base number of shares offered for sale. Companies may include a ‘greenshoe’ (or over-allotment clause) to issue additional shares if demand exceeds the initial offering.
5
Q
What is the purpose of a greenshoe option in an IPO?
A
The greenshoe option allows the company to increase the number of shares offered, ensuring unmet demand is fulfilled, which stabilizes the share price and optimizes capital raised.
6
Q
What are the three main stages of an IPO?
A
- Decision Stage: The company decides to go public, weighing the benefits and drawbacks of an IPO.
- Prospectus Preparation: The prospectus is created with input from investment banks, accountants, and legal advisers, detailing the terms of the IPO.
- Sale of Securities: Investment banks manage the sale, often creating a syndicate to assist in distributing shares to investors.
7
Q
What is the role of the prospectus in an IPO?
A
The prospectus is a legal document that outlines the terms of the IPO, including company details, the number of shares being issued, pricing, and potential risks.
8
Q
How do investment banks assist in the sale of securities during an IPO?
A
Investment banks lead-manage the sale, often forming syndicates of co-managers to distribute the securities to a broader network of investors.
9
Q
What is a SPAC, and how does it differ from a traditional IPO?
A
A SPAC (Special Purpose Acquisition Company) is a ‘blank cheque company’ created to merge with a private company, enabling it to go public. It is often quicker and easier than a traditional IPO.
10
Q
What are the key stages in a SPAC process?
A
- Creating the SPAC: Sponsors form the SPAC and invest initial operating funds.
- Raising Capital: The SPAC raises funds from outside investors, typically hundreds of millions of dollars.
- IPO of the SPAC: The SPAC is publicly listed, usually with shares priced at $10 each, often including tradeable warrants.
- Identifying a Target: The SPAC has up to two years to find and negotiate terms with a private company.
- Raising Further Funds (PIPE): Institutional investors provide additional funds for the merger.
- Investor Approval: SPAC investors vote on the proposed merger.
- Completing the Merger (De-SPAC): The SPAC invests funds into the target company, dissolves its governance, and transitions to a trading entity.
11
Q
What is an example of a high-profile SPAC merger?
A
BowX Acquisition Corp merged with WeWork in 2021, raising $1.3 billion to help WeWork go public. However, the deal later failed, and WeWork filed for bankruptcy in 2023.
12
Q
What options do SPAC investors have once a target is identified?
A
SPAC investors can either approve the merger or redeem their shares for their initial investment plus interest if they disagree with the proposed merger.
13
Q
What is firmunderwriting in an IPO?
A
In a firm underwritten IPO, investment banks guarantee to purchase all unsold shares, ensuring the issuer raises the desired capital.
14
Q
What is a best efforts underwriting in an IPO?
A
In a best efforts underwriting, the investment banks try to sell the shares but are not obligated to purchase unsold shares, transferring the risk of unsold shares to the issuer.
15
Q
What are the potential risks for investment banks in best efforts underwriting?
A
While they avoid financial losses from unsold shares, banks risk reputational damage if the offering is unsuccessful, which could reduce their chances of being involved in future IPOs.
16
Q
Why might a company or underwriter choose best efforts underwriting?
A
Best efforts underwriting might be chosen for riskier IPOs where market demand is uncertain, and it limits the financial risk to the underwriter.
17
Q
What is a follow-on offering?
A
A follow-on offering, also known as a secondary offering, is when an already listed company issues additional shares to raise more capital.
18
Q
Why would a company choose a follow-on offering?
A
Companies choose follow-on offerings to raise additional funds, typically when equity markets are robust and there is sufficient demand for shares at the desired price.
19
Q
Why might a follow-on offering not be viable during a bear market?
A
In a bear market, falling prices may result in insufficient demand for the shares at the company’s desired price.
20
Q
How is the structure of a follow-on offering similar to that of an IPO?
A
Like an IPO, a follow-on offering involves a base number of shares issued, with the option of a greenshoe to increase the number of shares if demand is high.
21
Q
What is a greenshoe option in the context of a follow-on offering?
A
A greenshoe option allows the company to issue additional shares beyond the base number to satisfy excess demand, stabilizing share prices.
22
Q
Why is a follow-on offering quicker and cheaper than an IPO?
A
A follow-on offering is faster and less expensive because the company has already completed an IPO and prepared a prospectus before, reducing time and costs.
23
Q
What are the three broad stages of a follow-on offering?
A
- The Decision: The company decides to raise capital by issuing additional shares.
- Preparation of the Prospectus: The prospectus is updated and prepared, leveraging prior experience from the IPO.
- Sale of Securities: Investment banks manage the sale, often forming syndicates to assist in distributing shares to investors.
24
Q
What is firm commitment / bought deal underwriting in a follow-on offering?
A
In firm commitment underwriting, the investment bank guarantees that all shares in the offering will be sold by committing to purchase any unsold shares itself.
25
What is best efforts underwriting in a follow-on offering?
In best efforts underwriting, the investment bank agrees to try its best to sell the shares but does not guarantee that all shares will be sold, leaving the issuer responsible for any unsold shares.
26
In what scenarios might best efforts underwriting be used?
Best efforts underwriting is often used for high-risk securities or during adverse market conditions where demand for the offering may be uncertain.
27
How do investment banks assist with the sale of securities in a follow-on offering?
Investment banks lead-manage the sale, often working with a syndicate of co-managers to distribute shares to their clients and maximize sales.
28
What are the risks for underwriters in a best efforts agreement?
Underwriters face no financial risk for unsold shares but may suffer reputational damage if the offering is unsuccessful.
29
Why might a company prefer underwritten underwriting over best efforts?
Underwritten underwriting ensures the company raises the desired capital because the bank guarantees the sale of all shares, reducing risk for the issuer.
30
What is an offer for sale, and how is it used in IPOs?
An offer for sale is the most common method for a company to achieve a stock market listing, where the company sells its shares to an issuing house (investment bank), which then invites the public to purchase shares at a slightly higher price.
31
Why might a company choose an offer for sale?
A company might choose an offer for sale to raise capital, allow founders to release equity stakes, or enable government privatization programs.
32
What role does the issuing house play in an offer for sale?
The issuing house, usually an investment bank, purchases shares from the company and prepares the prospectus to invite applications from the public for those shares.
33
What is the structure of an offer for sale?
The structure involves selling shares to an issuing house, which then resells them to the public. It may involve new shares or the sale of existing shares by current owners, often with a greenshoe option to manage demand fluctuations.
34
What is a fixed-price offer in an offer for sale?
A fixed-price offer sets a single price for shares, typically just below the anticipated market value to encourage full subscription and active secondary market trading.
35
How are shares allocated in an oversubscribed fixed-price offer?
In an oversubscribed fixed-price offer, shares are allotted either by scaling down all applications or by randomly satisfying a proportion of the applications in full.
36
What is a tender offer in an offer for sale?
In a tender offer, investors bid for shares by stating the price they are willing to pay above a minimum tender price, allowing the issuing house to set a settlement price that satisfies demand at or above this price.
37
Why are tender offers less common than fixed-price offers?
Tender offers are more efficient for maximizing proceeds but are more complex to administer, making them less common.
38
What is a greenshoe option in an offer for sale?
A greenshoe option allows underwriters to sell up to an additional 15% of the base shares offered to stabilize prices or support demand during an IPO or follow-on offering.
39
How does a greenshoe option work if demand exceeds the base offering?
If demand exceeds the base offering, the underwriter exercises the greenshoe option to sell additional shares, satisfying demand and stabilizing the price.
40
How does a greenshoe option work if demand for shares is weak?
If demand is weak and the share price falls, the underwriter buys back shares to support the price, avoiding exercising the greenshoe option.
41
What are the three broad stages of an offer for sale?
The Decision: The company decides to sell shares to raise capital or allow current shareholders to release equity.
Preparation of the Prospectus: A detailed document is prepared by the company and assessed by sponsors to meet regulatory requirements.
Sale of Securities: The issuing house invites the public to purchase shares, typically using fixed-price or tender offers.
42
Who may receive an allotment of shares in an offer for sale?
Shares may be allotted to institutional investors, retail investors, or a combination, based on demand and the method of allocation outlined in the prospectus.
43
Who is involved in the offer process for an offer for sale?
The issuing company, an issuing house (investment bank), regulatory authorities, sponsors, and investors are involved in the offer process.
44
How was the greenshoe option used in Saudi Aramco’s IPO?
Saudi Aramco’s IPO initially offered 3 billion shares, with an additional 450 million shares through the greenshoe option. The option was exercised, increasing proceeds from $25.6 billion to $29.4 billion.
45
How can a greenshoe option stabilize share prices in an IPO?
By enabling underwriters to sell additional shares if demand is high or repurchase shares if prices fall, the greenshoe option reduces price volatility and supports the offering's success.
46
What is a placing, and what are its advantages for the issuing company?
A placing is when a company markets shares directly to brokers or financial institutions, which then offer them to selected clients. It is quicker and less expensive than other IPO methods because it requires a less detailed prospectus and no underwriting.
47
What is selective marketing, and how does it relate to private placements?
Selective marketing targets specific investors, such as institutional or sophisticated investors, rather than the general public. Private placements operate similarly, allowing companies to raise capital with reduced disclosure requirements under regulations like the UK Prospectus Regulations or the US SEC’s Regulation D.
48
Why are placings and private placements considered less democratic than public offerings?
They limit access to shares to a restricted group of investors, excluding the general public, but provide a faster, less regulated, and cost-effective way for companies to raise capital.
49
What is the difference between exchangeable and convertible bonds?
A convertible bond can be converted into shares of the company that issued the bond, while an exchangeable bond can be exchanged for shares of another company held by the bond issuer.
50
How do convertible and exchangeable bonds benefit the bondholder and the issuer?
Bondholders receive the safety of coupons and repayment with potential upside from equity growth, while issuers raise funds more cheaply due to the bonds’ equity conversion/exchange feature.
51
How is the structure of an exchangeable/convertible bond offering similar to equities?
he issuer sets a base amount of bonds to issue and may include a greenshoe option to issue additional bonds if demand is strong.
52
What are the three main stages of an exchangeable/convertible bond offering?
Decision: The company decides to issue bonds with input from advisers like investment banks.
Preparation of the Prospectus: The terms of the bonds are outlined in a prospectus.
Sale of Securities: The investment bank manages the sale, potentially forming a syndicate.
53
What is the difference between underwritten and best efforts offerings for these bonds?
Underwritten offerings guarantee the sale of all bonds, while best efforts offerings commit only to trying to sell as many bonds as possible, with no guarantee of full sale.
54
What is the role of a listing agent (sponsor) in the IPO process?
A listing agent, often an investment bank, stockbroking firm, or accountancy practice, assesses the company’s suitability for listing, advises on the best method to go public, and coordinates the production of the prospectus.
55
What is a nominated advisor (nomad), and where is this term used?
A nomad is the listing agent for companies listing on the London Stock Exchange's AIM. The nomad ensures compliance with AIM's specific rules and advises on the listing process.
56
What are the responsibilities of a corporate broker?
A corporate broker acts as the interface between the company, the stock market, and investors. They advise on market conditions, investor sentiment, and the company’s positioning relative to its peers.
57
What corporate governance obligations must listed companies meet?
Companies must implement appropriate governance structures, such as separating the roles of chairman and CEO, appointing non-executive directors (NEDs), and having a qualified finance director to ensure accountability and transparency.
58
What reporting obligations do listed companies have?
Listed companies must provide reliable, audited annual accounts and regular financial updates, such as half-yearly or quarterly reports, to keep investors informed of progress and developments.
59
What is the role of the syndicate group in a large share issue?
The syndicate group, led by a sponsoring investment bank, markets the share issue to institutional and retail clients. It assists in pricing, demand assessment, and finding buyers for the issuing company’s shares.
60
What is the role of the book runner in a syndicate?
The book runner coordinates the overall demand for shares by managing the book-building process, which gathers investor interest and determines the final price range for the offering.
61
What responsibilities do co-lead managers have in a syndicate?
Co-lead managers may handle specific geographic regions (e.g., Europe or the US) and assist the lead manager in marketing, book-building, and investor engagement.
62
What is book-building, and how is it used in the share issuance process?
Book-building is the process of gathering subscription requests from potential investors, gauging demand, and finalizing the offering price based on the indicative price range and investor interest.
63
How is a share issue marketed during the syndicate process?
The issue is marketed through roadshows, public events, conferences, and meetings with institutional investors, with syndicate members collecting subscription requests and forwarding them to the lead manager.
64
What is the purpose of underwriting in a share issue?
Underwriting ensures that a share issue proceeds successfully by guaranteeing that underwriters will purchase unsold shares if demand from the public is insufficient.
65
What are the benefits of underwriting to the issuing company?
Underwriting guarantees the sale of shares and ensures minimum proceeds, protecting the issuing company from the risk of a failed flotation.
66
What are the risks and rewards for underwriters in a share issue?
Risks include potentially buying shares at a price higher than their value, while rewards include guaranteed fees for their services, regardless of whether they need to purchase shares.
67
How do underwriters determine the price of shares for a listing?
Underwriters work with the issuing company to assess demand, set an appropriate share price, and distribute the shares to their institutional or retail client networks.
68
What is stabilisation, and what does it achieve?
Stabilisation is the process of buying back newly issued securities to prevent a significant price drop after issuance. It helps the market adjust to the increased supply, reduces volatility, and prevents panic-selling by existing investors.
69
Who is involved in stabilisation, and how is it conducted?
The lead manager of the issue manages stabilisation by buying back securities if the price falls below a predefined level. Greenshoe options are commonly used to adjust supply based on demand.
70
What are the benefits of stabilisation for the issuing company and investors?
Stabilisation ensures the issuing company’s securities appear less volatile, protecting its reputation, while investors benefit from reduced price volatility and a more orderly market.
71
What are the governing principles and regulations for stabilisation?
Regulators, such as the UK’s FCA, require disclosure that stabilisation is happening and that market prices may not be fully representative. Exchanges may also use circuit breakers to temporarily halt trading during high volatility.
72
What is the primary role of a stock exchange?
A stock exchange facilitates the secondary market trading of listed securities, where buyers and sellers trade based on supply and demand.
73
What types of investments and participants are involved in stock exchanges?
Investments include shares, ETFs, bonds, and options. Participants include individuals, institutional investors, asset managers, insurance companies, and broker/dealers.
74
What are the main elements of a stock exchange’s regulatory framework?
The framework includes rules for listing securities, criteria for maintaining listings, and regulations governing trading by members.
75
What three strands make up the regulatory framework for stock exchanges?
he regulatory framework includes laws (e.g., the UK Companies Act), requirements of the local regulator (e.g., FCA), and the stock exchange's own rules.
76
How does the FCA regulate the London Stock Exchange (LSE)?
The FCA grants the LSE recognition as a Recognised Investment Exchange (RIE), ensuring it has adequate systems and controls, and oversees rules for admitting companies to the official list for trading.
77
What are the two stages of the listing process?
The first stage is filing a prospectus with the regulator, and the second stage is applying to the stock exchange for listing.
78
Why do stock exchanges require a minimum "free float" for listing?
To ensure a sufficient number of shares are available for public trading, making the securities relatively easy to buy and sell.
79
How does the UK Main Market differ from AIM regarding admission criteria?
The Main Market has stringent requirements, including a £30 million market capitalisation and 10% of shares in public hands, while AIM has no such restrictions.
80
What is the role of a sponsor for companies applying to the UK Main Market?
A sponsor (investment bank, broker, or law firm) guides the company through the listing process and ensures compliance with FCA Listing Rules.
81
What is the expected market capitalisation for a company listing on the UK Main Market?
At least £30 million.
82
What is the minimum percentage of shares that must be in public hands for the UK Main Market?
At least 10%
83
What are the main listing requirements for AIM?
AIM requires no restriction on share transferability and the appointment of a nominated adviser (nomad) and broker.
84
What happens if an AIM-listed company loses its broker or nomad?
Its shares are suspended from trading, and if the broker or nomad is not replaced within one month, the company is removed from AIM.
85
What are the ongoing obligations for companies listed on the UK Main Market?
They must issue audited annual accounts, half-yearly reports, and notify the market of any price-sensitive information.
86
What is the role of the Prime Standard on the Frankfurt Stock Exchange?
It serves as a premium segment with high transparency requirements in English, appealing to international investors.
87
What is the focus of the Scale segment on the Frankfurt Stock Exchange?
The Scale segment targets small and medium-sized enterprises (SMEs) seeking capital for growth.
88
How does the General Standard segment on the Frankfurt Stock Exchange differ from the Prime Standard?
The General Standard is cost-effective and targets national investors, while the Prime Standard imposes stricter transparency and international requirements.
89
What are supranational issuers, and why do they issue bonds?
Supranationals, such as the World Bank, issue bonds to raise money for international development projects and other global initiatives.
90
How do governments issue bonds, and what types exist?
Federal governments issue bonds like UK gilts and US Treasury bonds to fund borrowing needs. State or provincial governments, as well as municipalities, issue bonds like municipal bonds, which may offer tax advantages to local residents.
91
What are agency bonds, and who issues them?
Agency bonds are issued by government-backed entities for specific purposes. Examples in the US include Fannie Mae for mortgage finance and Sallie Mae for student loans.
92
Why do corporations issue bonds, and what types might they use?
Corporations issue bonds, including convertible bonds, to fund capital expenditures and other financing needs, often securing lower borrowing rates.
93
What are special purpose vehicles (SPVs), and how are they used in bond issuance?
SPVs are created by financial institutions to raise funds off their balance sheets, commonly used in asset-backed securities markets to provide off-balance-sheet financing
94
What are scheduled funding programmes, and why are they used?
Scheduled funding programmes are pre-arranged credit lines or planned bond issuances that allow companies to borrow money regularly, aligning with business developments.
95
What are medium-term notes (MTNs), and how do they provide flexibility?
MTNs are bonds with maturities between two and ten years, often issued under a shelf registration process that allows companies to issue smaller batches of bonds as needed, varying coupon rates and maturities based on market demand.
96
How does the auction method work for bond issuance?
In an auction, bidders submit the price they are willing to pay. The highest bidders are allocated bonds at the price they bid, starting from the highest bid until all bonds are sold.
97
How does the tender method differ from the auction method?
In a tender, all successful bidders pay a common strike price, which is the highest price at which all bonds can be sold. A minimum price is usually set beforehand.
98
What is a reverse inquiry in the context of MTNs?
A reverse inquiry occurs when clients of bond dealers request specific maturities and coupons. The issuer can decide whether to issue bonds based on these terms.
99
What is the role of pitching in the bond origination process?
Pitching involves potential investment banks presenting to the bond issuer to showcase their capabilities. The issuer selects a bank based on these presentations to assist with the bond issue.
100
What is an indicative bid, and when does it occur?
During the pitching stage, banks provide an indicative bid outlining their views on how much finance the issuer is likely to raise and the terms of the bond issue.
101
What is a mandate announcement in bond issuance?
After selecting the bank(s) to manage the bond issue, the issuer announces the mandate, naming the banks responsible for arranging the issue.
102
Why is a credit rating important for a bond issue?
A credit rating, provided by a credit-rating agency or bank, influences how much finance can be raised. Higher ratings attract more investors, and enhancements like insurance may be needed to achieve better ratings.
103
What is the purpose of a roadshow in the bond issuance process?
A roadshow involves the issuer and lead bank visiting major financial centers to meet potential investors and present the features of the bond issue.
104
What is required for listing a bond on an exchange?
To list a bond, the issuer must submit a detailed prospectus to the relevant listing authority for approval.
105
What is syndication, and why is it used in bond issuance?
Syndication involves multiple banks working together to sell the bonds. The lead manager coordinates the process, while co-managers focus on selling to their client bases, often in specific regions.
