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Investment Banking


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Investment Banking

Investment Banking

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  • An investment bank is a financial institution that raises capital, trades securities and manages corporate mergers and acquisitions. Investment banks work for, and profit from, companies and governments, by raising money through issuing and selling securities in capital markets (both equity and debt) and insuring bonds (e.g. selling credit default swaps), and providing advice on transactions such as mergers and acquisitions. A majority of investment banks offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities
  • Investment banks offer security to both corporations issuing securities and investors buying securities. For corporations investment bankers offer information on when and how to place their securities in the market. The corporations do not have to spend on resources with which it is not equipped. To the investor, the responsible investment banker offers protection against unsafe securities. The offering of a few bad issues can cause serious loss to its reputation, and hence loss of business. Therefore, investment bankers play a very important role in issuing new security offerings.
  • In market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade
  • While the research division generates no revenue, its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients There is a potential conflict of interest between the investment bank and its analysis in that published analysis can affect the profits of the bank. Therefore in recent years the relationship between investment banking and research has become highly regulated requiring a Chinese wall between public and private functions.
  • to ensure that the above mentioned economic risks are captured accurately (as per agreement of commercial terms with the counterparty), correctly (as per standardized booking models in the most appropriate systems) and on time (typically within 30 minutes of trade execution).
  • A method is negotiated for determining the price the investment banker & his syndicate will pay for the securities.
  • The firm does not directly select the investment banker. The investment banker that underwrites & distributes the issue is in effect chosen by an auction process. confined to 3 situations by legal issues (1) railroad issues (2) public utility issues (3) state & municipal bond issues
  • The securities are not underwritten. The investment banker attempts to sell the issue in return for a fixed commission on each security sold. Unsold securities are returned to the corporation.
  • Speed: because SEC registration is not required Reduced floatation costs: same as above & inv banking underwriting & distribution costs does not have to be absorbed Financing flexibility: terms of issue can be precisely tailored to meet specific needs of a company Restrictive covenants: dividend policy, working capital levels, raising of additional debt capital maybe affected by provisions in the private placement debt contract Possibility of SEC registration: if the investor should decide to sell the issue to a public buyer before maturity, it must be registered with the SEC
  • Transcript

    • 1. Investment Banking A Report by Raymund Sanchez
    • 2. Agenda
      • Definitions
      • Functions of an Investment Banker
      • Distribution Methods
      • Events in a Negotiated Sale
      • Private Placements
      • References
    • 3. Definitions
      • Investment Banker:
        • A financial specialist involved as an intermediary in the merchandising of securities.
        • Acts as a middleman by facilitating the flow of savings from those economic units that want to invest to those units that want to raise funds.
    • 4. Functions of an Investment Banker
    • 5. Functions of an Investment Banker
      • Core Business
        • Underwriting
        • Distributing
        • Advising
        • Others
      • Back Office
        • Operations
        • Technology
      • Middle Office
        • Risk Management
        • Corporate Treasury
        • Financial Control
        • Corporate Strategy
        • Compliance
    • 6. Functions of an Investment Banker
      • Core Business > Underwriting
        • assuming the risk of selling a security issue at a satisfactory price
        • term borrowed from insurance
    • 7. Functions of an Investment Banker
      • Core Business > Distributing
        • selling function of investment banking
        • the primary function of an investment bank is buying and selling products.
    • 8. Functions of an Investment Banker
      • Core Business > Advising
        • providing advise in the issuance & marketing of securities
        • research is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings.
    • 9. Functions of an Investment Banker
      • Core Business > Others
        • Global transaction banking
        • Investment management
        • Merchant banking
    • 10. Functions of an Investment Banker
      • Middle Office > Risk Management
        • involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades
        • setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall
    • 11. Functions of an Investment Banker
      • Middle Office > Corporate Treasury
        • responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring.
    • 12. Functions of an Investment Banker
      • Middle Office > Financial Control
        • tracks and analyzes the capital flows of the firm
        • adviser on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses
    • 13. Functions of an Investment Banker
      • Middle Office > Compliance
        • responsible for an investment bank's daily operations' compliance with government regulations and internal regulations
    • 14. Functions of an Investment Banker
      • Back Office > Operations & Technology
        • data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers
    • 15. Distribution Models
    • 16. Distribution Models
      • Negotiated Purchase
      • Competitive Bid Price
      • Commission / Best Efforts Basis
      • Privileged Subscription
      • Direct Sale
    • 17. Distribution Models
      • Negotiated Purchase
        • the underwriting firm that needs funds makes contact with an investment banker & deliberations concerning the new issue begin.
        • most prevalent method of distributing securities in the private sector
        • most profitable technique as far as investment bankers are concerned
    • 18. Distribution Models
      • Competitive Bid Price
        • several underwriting groups bid for the right to purchase the new issue from the corporation that is raising funds.
        • undue influence of the investment banker over the firm is mitigated & the price received by the firm for each security should be higher
        • as far as fund raising is concerned, the benefits gained from the advisory function of the investment banker is lost
    • 19. Distribution Models
      • Commission / Best Efforts Basis
        • investment banker acts as an agent rather than as a principal in the distribution process.
        • typically used for more speculative issues
    • 20. Distribution Models
      • Privileged Subscription
        • new issue is marketed to a definite & select group of investors
        • 3 target markets involved (1) current stock holders (2) employees (3) customers
    • 21. Distribution Models
      • Direct Sale
        • the issuing firm sells directly to the public without going through an investment banker in the process
        • relatively rare
    • 22. Events in a Negotiated Sale
    • 23. Events in a Negotiated Sale
      • Selection of an investment banker
      • Pre-underwriting conferences
      • Formation of the underwriting syndicate
      • Registering of the securities
      • Formation of the selling group
      • Due diligence meeting
      • Price pegging
      • Syndicate termination
    • 24. Events in a Negotiated Sale
      • Selection of an investment banker
      • Pre-underwriting conferences
      • Key Items to be discussed:
            • Amount of capital to be raised
            • Whether capital markets seem to be receptive at the time & the type of financing instrument
            • Whether the proposed use of funds appears reasonable
      • Tentative underwriting agreement
            • Approximate price the investment banker will pay for the securities
            • Upset price (escape mechanism for the benefit of the issuing firm)
    • 25. Events in a Negotiated Sale
      • Formation of the underwriting syndicate
      • syndicate: temporary association of investment bankers formed to purchase a security issue from a corporation for subsequent resale, for a profit to the underwriters.
      • purpose of syndicates:
          • The original investment banker could not finance the entire underwriting himself
          • Lowers the risk of loss for a single underwriter
          • Widens the eventual distribution effort
    • 26. Events in a Negotiated Sale
      • Registering of the securities
      • Registration statement
        • Historical facts about the firm
        • Financial facts about the firm
        • Administrative facts about the firm
    • 27. Events in a Negotiated Sale
      • Formation of the selling group
      • Due diligence meeting: a last chance gathering to get everything in order before taking the offering public
      • Price pegging: placing orders to buy at the agreed upon public offering price to mitigate downward price movements in the secondary markets
      • Syndicate termination: dissolution of the syndicate at the end of the contractual agreement
    • 28. Private Placements
    • 29. Private Placements
      • Public offerings :security issuer does not meet the ultimate investors in the financial instruments
      • Private placements :securities are sold directly to a limited number of institutional investors
    • 30. Private Placements
      • Advantages
        • Speed
        • Reduced floatation costs
        • Financing capability
      • Disadvantages
        • Interest costs
        • Restrictive covenants
        • Possibility of future SEC registration
    • 31. References
      • Stanley Block & Geoffrey Hirt, “Foundations of Financial Management”, 1994, P430
      • John Martin, William Petty, Arthur Keown, David Scott, “Basic Financial Management”, 1979, p512
    • 32. -END-