Primary Markets

Chapter 4

14 questions

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Primary Markets
Participants and Types of Offer

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4.1.1 Initial Public Offer
Stages
• Decision
- Appointment of an underwriting firm
- Creation of origination team

• Preparation of prospectus
- Marketing to investors
• Prospectus
• A prospectus is a detailed document providing potential investors with the information required
to make an informed decision on the company and its shares. It is required whenever a
company issues securities in order to raise capital from the public.

• Sale of securities

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4.2.1 Listing Advisers
Origination team
• A range of advisers working with the lead manager to help the company place
its new issue of shares/bonds:
- Sponsor (listing agent)
• Assesses the company’s suitability for listing
• Assesses the best method of bringing the company to market
• Co-ordinates the production of the prospectus
- Legal advisors
• Ensues all relevant matters are covered in the prospectus
- Public relations
• To created a positive perception of the company
- Accountants
• Validates the financial statements in the prospectus
- Corporate broker
• The interface between the company and the market
• Advises the company on current market conditions

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4.2.2 The Syndicate Group
Syndicate group

SHARES
SHARES PENSION
FUND

Co-lead Manager £
£

SHARES SHARES
INSURANCE
COMPANY
£ Co-lead Manager £
ISSUING
SHARES SHARES
COMPANY
WEALTHY
INDIVIDUAL
£ £
Co-lead Manager

SYNDICATE

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4.2.3/4 Underwriting and Stabilisation
Underwriting
• Purpose
- Means of guaranteeing a minimum level of proceeds from a share issue
- Used in all situations where share issues are generating proceeds (‘marketing
operations’)

• Underwritten vs. best efforts

• Structure
- Base deal
- Greenshoe (over-allocation option)

• No limit on number of underwriters

Stabilisation
• Where a lead manager in an issue purchases stock in the secondary market to
support the issue price

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4.1.3/4 Offers
Offer for subscription

Shares
Company A Investor

Offer for sale

Shares Shares

£££ £££
Company Issuing Investor
House

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4.1.5/6 Selective Marketing and Introductions
Placing – for qualified investors
• Selective marketing technique: Cheaper than offer for sale

O
Small investors would not be
offered shares in a placing.
P
££

Wealthy individuals

Institutions and wealthy individuals

would be offered shares in a placing.

• Book building

Introduction
• A company obtains a listing without issuing new share capital

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Primary Markets
Bond Issues

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4.4.1 Types of Bond Issuer
Types of bond issuer
• Governments
• Supranational bonds
- E.g. World Bank

• Municipal bonds
- E.g. States or local authorities

• Agency bonds
- Government sponsored agencies
• E.g. Federal Home Loans Bank in US

• Special purpose vehicles

• Corporate

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4.4.2 Bond Issuance
Government issues
• UK Government gilts: Issue – Debt Management Office (DMO)
- Competitive: Bids for ≥ £1,000,000 nominal

• French and German Government auction – bid pricing system

• US Government Auctions – tender style (single price auction)
- The United States Department of the Treasury – Federal Reserve

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4.3.2 Bond Issuance
Corporate issues
• There is typically a need to raise debt capital regularly to fund developments in
the business
• This can be done through
- Scheduled programmes
• Arrangement with a bank to borrow money rather than issue bonds
- Shelf registration
• Single registration covers multiple issues
- Up to two years
• Typically used in US with medium-term notes (MTN)

• Sometimes companies may issue MTNs in response to client requests

- Reverse enquiry

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