Investment-Banking-Publi课件

1、Investment Banking Public and Private Placement15Chapter OutlineWhat is investment banking?Functions of an investment bankerDilution of earningsPublic versus private financingLeveraged buyouts and debt for restructuring of a corporation2The Role of Investment BankingThe investment banker is the link

2、 between the corporations in need of funds and the investorResponsible for designing and packaging a security offeringResponsible for selling the securities to the public3Concentration of CapitalAllows large firms to take additional risks and satisfy the needs of an increasingly demanding capital ma

3、rketCompetition has propelled many businesses to the position they are at nowRaising capital has become an international propositionFirms that are very large have the ability to competeInternational consolidations with international buy-outs of banks have become common4Gramm-Leach-Bliley Act (1999)R

4、epealed the separation policy of the Depression-era lawsWhich included separating banking, brokerage, insurance, and investment banking into separate entitiesFederal Reserve and Treasury:Have the power to impose restrictions on the activities of the banksAllows strong banks to participate in the ven

5、ture capital market5Investment Banking CompetitorsThere is intense competition in the marketBeing a leader in one sector helps a firms overall reputationIt, however, does not ensure success in other areas6Functions of the Investment DealerUnderwriter:buying the security and reselling it to the publi

6、c (large companies). Takes a risk.selling security on commission basis (unknown companies)Market Maker: ensuring an available market by buying and selling the securityAdvisor:on securities issues, mergers and acquisitions, leveraged buyouts, corporate restructuringAgent:for private placements, merge

7、rs, acquisitionsPPT 15-47UnderwriterAn investment banker underwrites any risk associated with a new issue:By giving a firm commitment to purchase the securities from the corporationLarge investment houses assume risk of distributionSmaller investment houses may handle distributions for unknown corpo

8、rationsThis is done on a “best efforts” or commission, basis8Market MakerInvestment banker engaged in buying and selling of the security to ensure a liquid marketProvides research on the firm to encourage active investor interest9AdvisorServices offered include advising the client on a continuing ba

9、sis about:The types of securities to be soldThe number of shares or units for distributionThe timing of the saleImportant advisory services in the area of mergers and acquisitions, leveraged buyouts, and corporate restructuring are also offered10Agency FunctionsAn investment banker may act as an age

10、nt for a corporationThat wishes to place its securities privately with:An insurance company,A pension fund, orA wealthy individualInvolves in negotiation of the best possible deal for the corporation with potential investors11Distribution Process in Investment Banking12The SpreadThe underwriting spr

11、ead represents the total compensation for all participating members The lower a party falls in the distribution process, the higher the price for the sharesThe farther down the line the securities are resold, the higher the potential profitThe larger the dollar value of an issue, the smaller the spr

12、ead is as a percentage of the offering price13Allocation of Underwriting Spread14Pricing the SecurityInvestment BankerPrice of the stock is an important considerationConduct an in-depth analysis to determine a firms value: The companys industryFinancial characteristicsAnticipated earningsDividend-pa

13、ying capability15Pricing the Security (contd)Based on a technique deemed appropriate by the underwriter:A tentative price is assignedThis will be compared to others in that given industryAnticipated public demand also plays a major factorUnderpricingSetting the price slightly below the current marke

14、t valueCommon during the issuance of additional shares16DilutionProblem associated with the issuance of additional securities:Actual or perceived dilution of earnings effect on shares currently outstandingMay be caused by the perceived time lag in the recovery of earning per shareResulting from incr

15、ease in shares outstanding17Market StabilizationAn investment banker is responsible for stabilizing the offering during the distribution period:Accomplished by repurchasing securities when market price is below initial public offering priceStabilization lasts for two or three days after initial offe

16、ringPoor market environment - stabilization may be very difficult to achieveUnderwriter price support an exception to market manipulation18AftermarketResearch shows that the IPO generally tends to perform well in the immediate aftermarketAfter the first day of trading, IPO returns are approximately

17、3.4% lower than returns for similar sized firms over the first full year of tradingThe IPO appears to be a good deal for investors who purchase shares from the underwriter19Shelf Registration (1982)Permits large companies to file one comprehensive registration statementShould outline the firms finan

18、cing plans for up to 2 yearsThe firm can issue securities without further SEC approvalThis registration has become part of the underwriting processMost frequently used with debt issues, and utilized minimally with the equity markets20Public Vs. Private Financing for CompaniesPublicly financed compan

19、y:when shares of a company are offered to the publicanyone can buy shares of the stockPrivately financed company:privately owned or held by an individual or familysecurities not available to the general publicadditional funds may be raised by private placementPPT 15-921Advantages of Being PublicTo t

20、he Corporation:Tap security markets for greater amounts of fundsAssociated prestige better relationshipsAbility to purchase another firm using its own stock as currencyTo the Stockholders:Ability to achieve a higher degree of liquidity and to diversify his/her portfolioStockholders of a private corp

21、oration can sell holdings if it decides to go public22Disadvantages of Being PublicAll information must be made public through SEC and state filingsTremendous pressure for short-term performance by security analysts and large institutional investorsFor small firms, the underwriting spread and the ou

22、t-of-pocket costs can run in the 15-18% range23Public Offerings - ExamplesA classic example of instant wealth EDS goes publicInternet Capital GroupRefer to the chapter for the complete story24Public Offerings Examples25Internet Capital Group Price Chart (as of January 25, 2008)26Private PlacementSel

23、ling of securities not through the security market but directly:Insurance companiesPension fundsWealthy individualsDevice is employed by:Firms that wish to avoid or defer an IPO offeringA publicly traded company wishing to merge private funds into its financing package27Advantages of Private Placeme

24、ntNo lengthy, expensive registration process with the SECFirm has greater flexibility in negotiating than is possible in a public offeringInitial costs of a private placement may be considerably lower than those of a public issue28Disadvantages of Private PlacementInterest rate on bonds is usually h

25、igher to compensate the investor for holding a less liquid obligation29Going PrivateThe trend:1970s, a number of small firms gave up their public listings to be private1980s, 1990s, and mid-2000s, very large companies began going privateReason:Costs could be saved in annual report expenses, legal an

26、d auditing fees, and security analysts meetings30Methods of Going PrivateTwo ways of going private:A publicly owned company is purchased by a private company or a private equity fundTo repurchase all publicly traded shares from stockholders31Leveraged BuyoutEither the management or some other invest

27、or group borrows the needed cash to repurchase all the shares of the companyThe company exists with substantial debt and heavy interest costManagement of the private company must sell assets to reduce the debt loadCorporate restructuring occurs:Divisions and products are soldAssets redeployed into n

28、ew, higher-return areas32Leveraged Buyout (contd)Investment bankers, as specialists in the valuation of assets, try to determine the breakup value of a large companyThis is its value if all divisions were divided up and sold separately33PrivatizationPrivatization involves:Investment bankers taking c

29、ompanies publicThe companies sold have been previously owned by governments34Long-Term Debt and Lease Financing16Chapter 16 - OutlineBondsBond TerminologyPriority of Claims on BankruptcyMethods of Retiring (Repaying) BondsReading Bond Price Quotations3 Types of Bond YieldsBond RatingsThe Refunding D

30、ecisionOther Forms of Bond FinancingAdvantages and Disadvantages of Debt2 Types of LeasesAdvantages of LeasingLease vs. PurchaseSummary and ConclusionsPPT 16-236The Expanding Role of DebtGrowth in corporate debt is attributed to: Rapid business expansionInflationary impact on the economyInadequate f

31、unds generated from the internal operations of business firmsExpansion of the U.S. economy has placed pressure on U.S. corporations to raise capitalNew set of rules have been developed for evaluating corporate bond issues37Times Interest Earned for Standard & Poors Industrials38Firms and governments

32、 “borrow” money from investors by selling bondsA bond is a written promise that the borrower (firm) will pay the lender (investor) at a stated future date, the principal plus a stated rate of interestBonds differ from one another in terms of maturity (payment date), potential yield (interest rate),

33、and investment quality (risk)Several companies rate the quality of various bondsBondsPPT 16-439Bond TerminologyPar Value: principal or face value (usually $1,000)Coupon Rate:actual or stated interest rateMaturity Date:date when repayment of principal is dueIndenture:legal document detailing the corp

34、orations obligationsSecured Debt:where specific assets are pledged in the event of defaultDebenture:a L/T unsecured corporate bondPPT 16-540 Security provisionsSecured claim specific assets are pledge to bondholders in the event of default.mortgage agreement real property is pledged as security for

35、loan.Senior claims require satisfaction in liquidation proceedings prior to junior claimsNew property may become subject to a security provision by an “after acquired property clause”41 Unsecured DebtDebenture: an unsecured, long-term corporate bond.Subordinated debenture: an unsecured bond in which

36、 payment will be made only after the holders of designated senior debt issues have been satisfied.Junk bond:debt obligation of questionable quality ( with a rating below investment grade BBB), usually with a high expected yield.42Priority of Claims Secured Debt (first priority) Unsecured Debt (or De

37、benture) Preferred Shareholders Common Shareholders (last to receive any money)43Priority of Claims44Methods of Retiring (Repaying) BondsPrincipal at maturity:lump-sum payment when bond is dueSerial payments:bond is paid off in installmentsSinking fund:corporation contributes regularly to a trust fu

38、nd used to buy back bondsConversion:bond can be converted into shares of common stock at the option of the bondholderCall feature:corporation can redeem bonds early by paying a premium over par valuePPT 16-745Table 16-1Bonds: Corporate (partial)PPT 16-8Bombardier(formerly Bombardier-MLW Ltd.)8.3% De

39、bentures, due July 28, 2003DBRS Rating: AAug 4, 2000Issued: $150,000,000July 28, 1993O/S: $150,000,000Dec. 31, 1997Interest: 8.30% (S)Jan 28/July 28Redemption: Redeem, at any time at the greater of Canada Yield Price (Canada Yield + 0.30%) and parLead Underwriter(s): ScotiaMcLeod Inc.Trustee: Comput

40、ershare Investor Services Inc.46Company NameCoupon(interest rate %)Maturity Date(April 8, 2022)Price(Last transactionprice = $138.50/ $100)Yield(Annual interestMarket price)Change(Closing price up$1.11 fromprevious day)Reading Bond Price QuotationsPPT 16-947Bond Prices, Yields, and Ratings Financial

41、 managers must be sensitive to the bond market with regard to:Interest rate changesPrice movementsMarket conditions will influence:Timing of new issuesCoupon rate offeredMaturity dateBonds do not maintain stable long-term price patterns48Bond Price Table493 Types of Bond YieldsNominal Yield (or Coup

42、on Rate):stated interest rate divided by par valueCurrent Yield:Stated interest rate divided by current price of the bond Yield-to-Maturity (YTM): interest rate that equates the future (expected) interest payments and payment at maturity to the current market price of the bondaffected by current mar

43、ket interest rates If rates , YTM , bond price and bond rating If rating high (low risk), YTM PPT 16-1150Bond RatingsTwo major bond rating agencies:Moodys Investor ServiceStandard & Poors CorporationRatings are based on a corporations:Ability to make interest paymentsConsistency of performanceSizeDe

44、bt-equity ratioWorking capital position, etc.51Bond RatingsRating ServiceHigh GradeMedium Grade (Investment Grade)SpeculativePoor GradeMoodysAaa AaA BaaBa BCaa to CStandard & PoorsAAA AAA BBBBB BCCC to DDominion AAABBBCBRisk FactorLowHighBond RatingsPPT 16-1352The Refunding DecisionExample: bonds is

45、sued at 11.75% witnesses a drop in interest rates to 9.5%Assuming that the interest rates will rise:The expensive 11.75% bonds may be redeemedA new debt at the prevailing 9.5% may be issuedThis process labeled as a refunding operationIt is made possible by the option of call provision53A Capital Bud

46、geting ProblemThe refunding decision involves:Outflows in the form of financing costs related to redeeming and reissuing securitiesInflows represented by savings in annual interest costs and tax savings54Restatement of Facts55StepsA. Outflow considerations:1. Payment of call premium2. Underwriting c

47、ost on new issueB. Inflow considerations:3. Cost savings in lower interest rates4. Underwriting cost on old issueC. Net present value:Present value of inflow present value of outflow = net present value56Step C - Net Present Value57Other Forms of Bond FinancingZero-Coupon Bond / Strip Bond:does not

48、pay interestis issued at a deep discount from face valueFloating Rate Bond:interest rate paid on the bond changes with market conditionsReal Return Bondprincipal adjusted for inflationRevenue Bondsecurity based upon cash flowEurobond:bond issued in another countryPPT 16-1758Zero-coupon Rate BondA bo

49、nd that does not pay interestAdvantages to the corporation:Immediate cash inflow, no outflow until maturityThe difference in the value at maturity can be amortized for tax purposesAdvantage to the investor:Allows lock in of a multiplier of the initial investmentDisadvantages:Annual increase in the v

50、alue of the bonds is taxable as ordinary incomePrices are volatile in nature59Zero-Coupon and Floating Rate Bonds60Floating Rate BondThe interest rate paid on the bond changes with market conditionsAdvantage to the investor:A constant market value for the security, although interest rates varyExcept

51、ion:These bonds often have broad limits that interest payments cannot exceed61Eurobond MarketA bond payable in the borrowers currency but sold outside the borrowers countryUsually sold by an international syndicate of investment bankersDisclosure requirements in the Eurobond market are less demandin

52、g62Examples of Eurobonds63Advantages and Disadvantages of Debt Advantages of Debt:interest payments are tax deductible to a firmwise use of debt may lower a firms weighted average cost of capital (WACC)financial obligation is fixedno reduction in control or equity of present shareholderscompany may

53、get a better return on equity from leverage PPT 16-1964Advantages and Disadvantages of Debt Disadvantages of Debt:interest and principal must always be met when due, regardless of a firms financial positionagreements may restrict financial management in firmpoor use of debt may lower a firms stock p

54、riceexpensive financing when interest rates are highPPT 16-2065Leasing as a Form of DebtLeasing has the characteristics of a debtA corporation contracts to lease and signs a noncancelable, long-term agreementCompanies are expected to fully divulge all information about leasing obligationsLeasing was

55、 made official as a result of Statement of Financial Accounting Standards (SFAS) No. 13:issued by the FASB in November 197666Capital Lease (Financing Lease)Four conditions for identification include:The arrangement transfers ownership of the property to the lessee by the end of the lease termThe lease contains a bargain purchase price at the end of the leaseThe lease term is equal to 75% or more of the estimated lif