Underwritten, Syndicated Offerings and Shelf Registration

Issuers sell bonds initially in primary bond markets. Existing bonds are subsequently traded among investors in secondary bond markets. A bond can be sold in a public offering, in which anybody may buy the bond, or by private placement, in which only a selected group of investors can bid. Investment banks serve as intermediaries between the organization issuing the securities and the investors who purchase them.

Underwritten Offering

In an underwritten offering, an investment bank guarantees the sale of the bonds at a negotiated offering price. The underwriter takes the risk of buying the securities and then sells them to investors.

Best Efforts Offering

In best efforts offering, the investment bank functions only as a broker for a commission. As such, there is less incentive to sell the securities.

Syndicated Offering

For larger bond issuances, the underwriter is usually a group (or syndicate) of investment banks. A lead underwriter invites other investment banks to join the syndicate. If the offering price is set too high or too low, the offering will be under or oversubscribed, resulting in low or high demand.

Shelf Registration

Shelf registration allows authorized issuers to offer additional bonds to the public without a new offering. For instance, Tesco used a shelf registration for a series of issues. Most sovereign bonds are sold via a public auction. Private placements are non-underwritten offerings of bonds that are sold only to a small group of investors such as insurance companies and pension funds.

Public Auction

A public auction is a mechanism by which the public is invited to place bids on certain issues. In the US, all the winning bidders pay the same price and receive the same coupon rate for the securities. In Canada and Germany, multiple-price auctions exist, generating multiple prices and coupon rates for the same bond issue.

Question

Under which type of offering does an investment bank take the least amount of risk?

1. Best effort offer.
2. Syndicated offer.
3. Underwritten offer.

Solution

The correct answer is A.

In a best effort offering, an investment bank functions only as a broker in return for a commission. Therefore, the bank does not bear much risk.

B is also incorrect. A syndicated offering is similar to an underwritten offer except that the underwriter is made up of a group of investment banks.

C is incorrect. In an underwritten offer, the investment bank guarantees the sale of the bonds. If the bank is unable to sell all the securities, it has to either keep or sell them at a loss.