international banking - 4

7/30/2019 International Banking - 4

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International Banking - 4

BA (Hon) Banking and Finance

Sunderland Business School

Dr Tim Zhou


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INTERNATIONAL INVESTMENTBANKING


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Overviews

Investment banks are more active internationallythan other types of banks

International network

Highly skilled salespeople, traders, consultants,analysts

Sophisticated computer systems


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Overviews

International investment banks underwriteand sell financial securities to investors (inprimary markets)

Important long-term equity and debt finance forcorporations (industrial firms, public utilities, banks,insurance companies) and governments and sub-nationalentities (municipalities, states, provinces etc)

Market making and trading

Investment banks also trade securities in secondarymarkets

offering a range of advisory services


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Overviews

Three typical organisational forms of investmentbanks

Partnership Goldman Sachs, this form is disappearing !

A Unit of conglomerate an arm of an universal bank, e.g.Barclays Capital

Publically listed firm maximisation of the shareholdervalue


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Functions of Investment banks -

Underwriting Underwriting raising capital on behalf of companies

and governments from investors, i.e. selling newsecurities

Underwriter provides advice for issuer, distribution of

securities, sharing of risks of issue, and stabilisation ofaftermarket

Underwriter also certifies the issue by putting its reputationbehind the issue

To actually start the underwriting process, an investment bank

needs to win the mandate first as the issuers may ask fewpotential investment banks to offer their terms and conditions

If an investment bank wins the mandate, it become the leadmanager and can form a syndicate


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Functions of Investment banks-

Underwriting Firm commitment contracts Vs best efforts

contracts The majority of issuances contracts are the firm

commitment contracts

Firm commitment contracts entail the commitment of aninvestment bank to purchase the whole issue first beforeselling to potential investors

Best efforts contracts do not guarantee that investmentbanks will sell all the securities. The investment bank only

makes its effort to do so Standby underwriting is when an issuer offers new shares

to exiting shareholders (rights offering) and anunderwriter sells the unsold shares to potential investors


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Underwriting Sequence

Engagement: Mandatesigned by issuer engaginglead manager

Due Diligence: Conducted

by Lead manager Documentation: Loan

agreement, Prospectus

Signing: Underwritingagreement signed andissue priced

Closing: Settlement of theoffering

Engagement

Due Diligence andDocumentation

Signing and Pricing

Closing

Beauty Contest


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The Beauty Contest

Criteria for Selecting a Lead Manager 1

Experience with similar transactions (sector,market, currency, maturity, high or low-quality

issuers) Ranking in League Tables

Placement power with institutional and/or retail

investors Standing in secondary market as market maker

and commitment to secondary market trading


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The Beauty Contest (Cont.)

Criteria for Selecting a Lead Manager 2

Quality/reputation of research

Proposed marketing strategy (pricing,timing, issue size, etc.)

Proposals for Roadshow

Relationships with potential co-managers

Senior management commitment to backingissue with people and capital


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The Roadshow

Organized by global coordinator and leadmanagers

Informal presentation by management to

potential investors Attendance limited to professional

intermediaries and investing institutions

Content must be consistent withinformation in draft version of prospectusor offering circular.


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Stabilisation

A form of market manipulation by theunderwriter near the time of the issue

Underwriting syndicate legally allowed toconspire to fix prices in market until entire

issue is sold out


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From a 1929 Textbook on

Investment Banking

In floating any new issues of securities,therefore, the seller desires to haveconditions so shaped that the price of the

issue will remain stable, or perhaps it willrise slightly, during the period in which thesecurities are being absorbed by the market.. .establishing a favorable psychological

attitude of investors. . The termmanipulated market is not altogether amisnomer.


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The Tombstone

Newspaper announcements of securities issues, listingunderwriting syndicate

Why called tombstones? Origin of term forgotten.Resemblance?

The only kind of ad allowed during cooling-off period Cross between birth announcement and obituary.

Tombstones appear after the securities have already beensold, of course they are now on the market.

Investment bankers love to read them


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Underwriting Economics

Selling

Concession

60%

Underwriting

Fee

20%

Management

Fee20%

Management Fee:Normally sharedequally amongmanagers (may besubject to apraecipium for GlobalCoordinator or LeadManager)

Praecipium - The amountof the front-end fee notdistributed to thejoining members of asyndication

Selling Concession:Payable as apercentage ofallocation (determinedby book-runner)

Underwriting Fee: Basedon underwritingcommitment (often

less expenses ofoffering)


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Variations on the Usual

Underwriting Process

Preemptive rights offering: existing shareholdershave rights to buy issue below market value

Directly Public Offering (DPO): Company itself

sells its securities directly to public, usually overthe web. Small firms. Example: Internet Ventures, aweb service provider, raised $3.8 million in 1998by advertising the securities to its customers onthe web.


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Private Placement

Sold only to sophisticated investors, exempt fromSEC registration.

Regulation D: Private issues cannot be advertised,

defines sophisticated investors SEC has provided that privately placed securities

cannot be sold for two years after purchase.

SEC Rule 144a April 1990 eliminates two-year

holding period for institutions with over $100million in the security


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Functions of Investment banks-

IPOs

Initial public offering a company raises capital byselling common stock to the public for the firsttime

Investment banks advise firms about pricing, informationdisclosure

help issue the prospectus and actually sell the shares oneffective date to the public

Investment banks earn management fee, underwriting feesand selling concession


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Secondary market trading

Apart from underwriting and IPOs (primarymarket making), investment banks also engage insecondary market trading

Investment banks have skilled traders,salespeople, analysts to help them generate profits

Investment banks do arbitrage - the practice oftaking advantage of a price difference between twoor more markets


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Arbitrage

Suppose that the exchange rates (after taking out the feesfor making the exchange) in London are 5 = $10 = 1000and the exchange rates in Tokyo are 1000 = $12 = 6.Converting 1000 to $12 in Tokyo and converting that $12

into 1200 in London, for a profit of 200, would bearbitrage. In reality, this type of arbitrage is so simple thatit almost never occurs

Arbitrage has the effect of causing prices in different

markets to converge. As a result of arbitrage, the currencyexchange rates, the price of commodities, and the price ofsecurities in different markets tend to converge


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Advisory services

Corporate restructuring mergers andacquisitions

Large number of M&As in the US, EU

Cross-border M&As and the role of internationalbanks

M&As in financial industry also occur morefrequently due to deregulation, the development of

capital markets International banks provide advisory services to

either acquiring firms or target firms


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Advisory services

The popularity of leveraged buyout LBO -the acquisition of a company or division of acompany with a substantial portion of

borrowed funds

The assets of the acquired company areused as collateral for the borrowed capital,

sometimes with assets of the acquiringcompany


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LBO

Typically, leveraged buyout uses a combination ofvarious debt instruments from bank and debtcapital markets. The bonds or other paper issued

for leveraged buyouts are commonly considerednot to be investment grade because of thesignificant risks involved

an existing internal management team (a management

buyout) an external management team (a management buy-in), or

a third party (a leveraged acquisition)


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Many other services

International investment banks also provideproject financing, leasing, derivativestrading, merchant banking, help hedge

financial risks (i.e. tailor-made derivativesecurities )


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Reading list

The partnership of investment banks the example ofGoldman Sachs

http://www.independent.co.uk/news/business/analysis-and-features/the-firm-inside-goldman-sachs-428415.html

A Guide to the Initial Public Offering Process by Ellis andMichaely, 1999 (on SunSpace)

The role of bank advisors in mergers and acquisitions -page 197-203 (non-technical part only)

http://wlxt.whut.edu.cn/new/syyhjyygl/otherSource/literature/englishHandpick/The%20Role%20of%20Bank%20Advisors%20in%20Mergers%20and%20Acquisitions.pdf
http://www.independent.co.uk/news/business/analysis-and-features/the-firm-inside-goldman-sachs-428415.htmlhttp://www.independent.co.uk/news/business/analysis-and-features/the-firm-inside-goldman-sachs-428415.htmlhttp://wlxt.whut.edu.cn/new/syyhjyygl/otherSource/literature/englishHandpick/The%20Role%20of%20Bank%20Advisors%20in%20Mergers%20and%20Acquisitions.pdfhttp://wlxt.whut.edu.cn/new/syyhjyygl/otherSource/literature/englishHandpick/The%20Role%20of%20Bank%20Advisors%20in%20Mergers%20and%20Acquisitions.pdfhttp://wlxt.whut.edu.cn/new/syyhjyygl/otherSource/literature/englishHandpick/The%20Role%20of%20Bank%20Advisors%20in%20Mergers%20and%20Acquisitions.pdfhttp://wlxt.whut.edu.cn/new/syyhjyygl/otherSource/literature/englishHandpick/The%20Role%20of%20Bank%20Advisors%20in%20Mergers%20and%20Acquisitions.pdfhttp://wlxt.whut.edu.cn/new/syyhjyygl/otherSource/literature/englishHandpick/The%20Role%20of%20Bank%20Advisors%20in%20Mergers%20and%20Acquisitions.pdfhttp://wlxt.whut.edu.cn/new/syyhjyygl/otherSource/literature/englishHandpick/The%20Role%20of%20Bank%20Advisors%20in%20Mergers%20and%20Acquisitions.pdfhttp://www.independent.co.uk/news/business/analysis-and-features/the-firm-inside-goldman-sachs-428415.htmlhttp://www.independent.co.uk/news/business/analysis-and-features/the-firm-inside-goldman-sachs-428415.htmlhttp://www.independent.co.uk/news/business/analysis-and-features/the-firm-inside-goldman-sachs-428415.htmlhttp://www.independent.co.uk/news/business/analysis-and-features/the-firm-inside-goldman-sachs-428415.htmlhttp://www.independent.co.uk/news/business/analysis-and-features/the-firm-inside-goldman-sachs-428415.htmlhttp://www.independent.co.uk/news/business/analysis-and-features/the-firm-inside-goldman-sachs-428415.htmlhttp://www.independent.co.uk/news/business/analysis-and-features/the-firm-inside-goldman-sachs-428415.htmlhttp://www.independent.co.uk/news/business/analysis-and-features/the-firm-inside-goldman-sachs-428415.htmlhttp://www.independent.co.uk/news/business/analysis-and-features/the-firm-inside-goldman-sachs-428415.htmlhttp://www.independent.co.uk/news/business/analysis-and-features/the-firm-inside-goldman-sachs-428415.htmlhttp://www.independent.co.uk/news/business/analysis-and-features/the-firm-inside-goldman-sachs-428415.htmlhttp://www.independent.co.uk/news/business/analysis-and-features/the-firm-inside-goldman-sachs-428415.htmlhttp://www.independent.co.uk/news/business/analysis-and-features/the-firm-inside-goldman-sachs-428415.htmlhttp://www.independent.co.uk/news/business/analysis-and-features/the-firm-inside-goldman-sachs-428415.htmlhttp://www.independent.co.uk/news/business/analysis-and-features/the-firm-inside-goldman-sachs-428415.html


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Reading list

Leveraged buyout

http://mba.tuck.dartmouth.edu/pecenter/research/pdfs/LBO_Note.pdf
http://mba.tuck.dartmouth.edu/pecenter/research/pdfs/LBO_Note.pdfhttp://mba.tuck.dartmouth.edu/pecenter/research/pdfs/LBO_Note.pdfhttp://mba.tuck.dartmouth.edu/pecenter/research/pdfs/LBO_Note.pdfhttp://mba.tuck.dartmouth.edu/pecenter/research/pdfs/LBO_Note.pdf

international banking - 4

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