INVESTORS AND MARKETS : Selling securities
The aim of all types of equity offerings is to sell the shares to investors at the highest price at any given time.
To achieve this, the large gap in the quantity and quality of information available to the issuer compared with that available to the investor must be reduced. One of the roles of banks in equity offerings is to inform investors by passing on information obtained from the issuer. The bank has three other roles: it must structure the deal, distribute the securities and generally provide the issuer with a guarantee at a given level.
There are two main types of equity placements:
- bought deals.
Book-building means that the bank or the banking syndicate will only commit itself to the deal if it knows that there is investor appetite for the shares. Following a phase of dissemination of information to investors, investor intentions to subscribe are recorded in an order book. It is only at this stage that the banks will sign a firm underwriting agreement, thus limiting the risk taken. For a bought deal, the banks will buy the securities from the issuer, and it is up to the banks to place the securities with investors as quickly as possible in order to limit the risk.
Initial public offerings are very complex transactions and involve the dissemination of appropriate information to a variety of investors. Two types of offering exist side by side. There is the underwritten deal, when the banking syndicate places the securities with institutional investors on the basis of the orders recorded in the order book. Generally, a retail public offering is made to retail investors at the same time: in a retail public offering, a price range is set before the offering, but the exact price is set after the offering. The final price reflects market demand. When the offer to retail investors is a fixed-price offer, the issue price is pre-set. Generally identical to the price offered to institutional investors, it is totally independent of the market. Minimum price offerings and full listings using standard market procedures are rarely used these days.
There are two techniques for carrying out equity issues of companies that are already listed, depending on how eager existing shareholders are to subscribe to new shares. There is the fixed-price capital increase with pre-emptive subscription rights, or a capital increase without pre-emptive subscription rights but possibly with a period during which existing shareholders are given priority to subscribe.
For the former, the issue price is set at a significant discount to the market price. In addition, in order to avoid penalising existing shareholders, the issue comes with pre-emptive subscription rights, which are negotiable. Accordingly, the price of the new shares is equivalent to the stock's current market value even if the price of the new shares is below the current share price. A pre-emptive subscription right is akin to a call option.
A capital increase without a pre-emptive subscription right, for which shareholder approval is required, is an underwritten deal. The issue price is close to the market price. For unlisted companies, capital increases are carried out with or without pre-emptive subscription rights, with defined investors who have been identified following a private placement.
Block trades and issues of convertible bonds are carried out via book-building (or accelerated book-building which takes only a few hours) or via a bought deal.
The procedure a company uses to issue bonds depends first and foremost on the company's rating (whether the stock is investment grade – i.e. rated BBB or higher – or non-investment grade – i.e. lower than BBB). A company whose stock is rated as investment grade can invite banks to bid for the opportunity to carry out a bought deal, or opt for book-building. Whatever procedure is chosen, the deal is completed within a shortened time frame.
For non-investment grade companies, the placement procedure is closer to the capital increase procedure via book-building.
Convertible bonds, despite their apparent complexity, are products that are relatively easy to place as they offer substantial guarantees. They can be sold to investors within a relatively short period.
The procedure for placing a syndicated loan is similar to that for placing a bond issue with a limited number of investors. The banks involved are generally keen to develop a business relationship with the borrower.