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
- 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.
- 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.
- 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.
Related Terms
- 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
- “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.
- “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.
- “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
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