Placed Deal

Placed Deal Market Issuance Securities Bonds Merchant Banks Financial Institutions Capital Markets Investment Banking
A placed deal is a financial transaction in which a bank or a group of banks commit to marketing an entire new issue of bonds or similar securities without guaranteeing the success of the issuance.
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Placed Deal

A placed deal refers to a financial arrangement in which one or more banks take on the responsibility of marketing a whole new issuance of bonds or securities. Unlike a bought deal, the issuing entity (borrower) is not guaranteed by the bank that the entire issue will be sold successfully. Placed deals are particularly common amongst smaller financial institutions like merchant banks, which may not possess extensive marketing departments but still wish to participate in underwriting new issues of securities.

Examples of Placed Deals

  1. Corporate Bonds: A mid-sized corporation looking to raise funds might opt for a placed deal where a merchant bank agrees to market its new bond issue.
  2. Municipal Bonds: A local government issuing bonds to finance infrastructure projects could use a placed deal, relying on a smaller financial institution to place the bonds.
  3. Convertible Securities: A startup company might issue convertible securities and choose a placed deal where a boutique investment bank markets these securities to potential investors without providing a purchase guarantee.

Frequently Asked Questions (FAQs)

1. What is the main difference between a placed deal and a bought deal? A placed deal involves marketing a new issue of bonds or securities without a guarantee that the issue will be sold, while a bought deal guarantees that the bank will purchase the entire issue and resell it to the public.

2. Why do smaller financial institutions prefer placed deals? Smaller financial institutions, such as merchant banks, prefer placed deals because they allow them to participate in the issuance of new securities without needing extensive marketing departments and without taking on the risk of unsold securities.

3. How does a placed deal benefit the issuing entity? For the issuing entity, a placed deal can provide access to capital markets without the necessity to secure a bought deal guarantee, which can be more costly and harder to obtain, especially for smaller or less creditworthy entities.

4. What are the risks associated with placed deals for the issuer? The primary risk for the issuer is that the securities might not be fully subscribed, potentially leaving them with unsold securities and unraised capital.

5. Do placed deals affect the pricing of the issued securities? Yes, since placed deals do not guarantee the sale of the entire issued securities, they might be priced more conservatively to attract potential buyers in the market.

  • Bought Deal: A financial arrangement where an underwriter buys the entire issuance of securities from the issuer and resells it to the public, bearing the risk of unsold securities.
  • Underwriting: The process by which investment banks raise investment capital from investors on behalf of corporations and governments issuing securities.
  • Merchant Bank: A financial institution primarily engaged in underwriting and other related financial advisory services for complex and significant financial transactions.

Online References

Suggested Books for Further Studies

  1. “Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions” by Joshua Rosenbaum and Joshua Pearl - An excellent resource for understanding the core concepts of investment banking, including underwriting.
  2. “The Business of Investment Banking: A Comprehensive Overview” by K. Thomas Liaw - This book offers an in-depth look at investment banking operations, including the mechanics of securities issuance.
  3. “Handbook of Fixed-Income Securities” by Frank J. Fabozzi - Provides a comprehensive understanding of fixed-income securities including bonds, with valuable insights for anyone involved in placed deals.

Accounting Basics: “Placed Deal” Fundamentals Quiz

### What is a placed deal in the context of finance? - [ ] An order to buy previously issued securities. - [ ] A guaranteed purchase of all new issues. - [x] A bank's commitment to market new issues without guaranteeing sales. - [ ] The resale of securities by investors. > **Explanation:** A placed deal is where banks market new bonds or securities but do not guarantee that these will be sold. ### Who typically prefers placed deals? - [ ] Large investment banks. - [ ] Central banks. - [x] Smaller financial institutions like merchant banks. - [ ] Retail investors. > **Explanation:** Smaller financial institutions like merchant banks prefer placed deals as they don't have extensive marketing departments. ### What primary risk does a placed deal pose to the issuer? - [x] The issued securities may not be fully subscribed. - [ ] Increased regulatory scrutiny. - [ ] Higher taxation. - [ ] Legal actions from stakeholders. > **Explanation:** The main risk is that all the issued securities may not be sold, leading to unmet capital-raising goals. ### What is the opposite of a placed deal? - [ ] Book building. - [ ] Auction process. - [x] Bought deal. - [ ] Direct listing. > **Explanation:** A bought deal is the opposite, where the bank guarantees buying the entire issuance. ### How does a placed deal benefit smaller issuers? - [ ] It guarantees higher subscription. - [x] It provides access to capital markets without needing a purchase guarantee. - [ ] It eliminates all marketing costs. - [ ] It provides fixed returns on the issuance. > **Explanation:** It allows smaller issuers to access capital markets without having to afford the often higher cost of bought deals. ### What could lead to conservative pricing in placed deals? - [ ] Regulatory requirements. - [ ] Competitive markets. - [x] The absence of guarantee on full subscription. - [ ] Downgrade by rating agencies. > **Explanation:** Securities might be priced conservatively due to the lack of guaranteed subscriptions to attract buyers. ### Which organizations often engage in placed deals? - [ ] Large corporations - [ ] Central banks - [ ] Mutual funds - [x] Local governments and smaller corporations > **Explanation:** Smaller corporations and local governments often use placed deals to issue bonds or raise capital. ### What does underwriting in finance entail? - [ ] Trading existing securities. - [x] Raising investment capital for new issues. - [ ] Auditing financial statements. - [ ] Providing loans. > **Explanation:** Underwriting involves financial firms raising investment capital from investors for corporations and governments. ### How does a placed deal differ from traditional marketing methods? - [ ] It includes guarantees on sales. - [x] It does not guarantee that the issued securities will be sold. - [ ] It utilizes digital platforms exclusively. - [ ] It requires fewer regulatory filings. > **Explanation:** Placed deals do not come with guarantees that the marketed securities will be purchased by investors. ### What factor contributes to the preference of merchant banks for placed deals? - [x] Lack of extensive marketing departments. - [ ] Heavy involvement in retail banking. - [ ] High liquidity. - [ ] Strong presence in international markets. > **Explanation:** Merchant banks prefer placed deals as they often do not have the wide-reaching marketing capabilities of larger institutions.

Thank you for engaging with our comprehensive look into placed deals and challenging your knowledge with our sample quiz. Stay informed and continue to expand your financial expertise!

Tuesday, August 6, 2024
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