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Guide to investment banking terms


Billy Cortez

Billy Cortez

If last year’s global economy were considered a “Goldilocks” economy, this year seems to be a different scenario; it has been all about the bears from the second quarter. In fact, this is the worst start for equities since 2010. Investors just woke up to the fact that there are indeed trends in the global economy working in the opposite direction. Global economy’s hesitation appears to unnerve the global markets. For a change, let’s do something else. Get into a learning phase. Here’s a list that contains terms we need to know pertaining to investment banking:

Best-efforts underwriting — A type of underwriting agreement in which the underwriters only agree to use their best efforts to sell the shares on the issuer’s behalf. The underwriters do not commit to purchase any unsold shares.

Bridge financing — Financing obtained by a company expecting to secure permanent financing (e.g., through an initial public offering) within a short time, such as two years.

Capitalization — The company’s debt and equity structure.

Comfort letter — A letter provide by a company’s independent auditors, detailing procedures to perform at the request of the underwriters. The letter supplements the underwriter’s due diligence review.

Due diligence — The responsibility of those preparing and signing the registration statement to conduct an investigation in order to provide a reasonable basis for their belief that statements made in the registration statement are true and do not omit any material facts. Proper due diligence can help protect these parties from liability in the event they are sued for a faulty offering. The company, on the other hand, has strict liability for errors or omissions in the registration statement.

Firm-commitment underwriting — A type of underwriting agreement in which the underwriters agree to purchase all the shares in the offering and resell them to the public. Any share not sold to the public are paid for and held by the underwriters for their own account.

Float — The total number of a public company’s outstanding shares held by the general public. For example, if a company offers 10 million shares to the public in an IPO and has 20 million shares outstanding, it’s float (or public float) is 10 million shares.

Green shoe option — An over-allotment option granted to underwriters that allows them to purchase up to a specified number of additional shares from the company in the event that they sell more shares than allocated to them in the underwriting agreement. The Green Shoe Corporation was the first company to use this technique.

Initial public bankers — A corporation’s first offering of stock to the public.

Investment bankers — Specialists who advise companies on available sources of financing and the optimal time for a public offering of securities, and who often also act as underwriters for a public offering.

Lead underwriters — The underwriter who manages a securities offering and who acts on behalf of the underwriting syndicate. Traditionally listed on the left on the cost of a prospectus. Also known as managing underwriter.

Lock-up period — A period of time, usually 180 days, for which insiders are restricted from selling their shares.
Management’s discussion and analysis (MD&A) — Section of an IPO prospectus that provides investors with management’s assessment of historical financial information about expectations for the future.

Price-earnings ratio — The price of a share of common stock divided by earning per share.

Tranche — A French word used to describe segments of the IPO being sold in different countries. A multi-tranche distribution is commonly used for large US and foreign IPOs for which there is demand both in the United States and in the foreign country.

Atty. Billy Cortez is an independent board director at First Metro (Metrobank Group). He was formerly FINEX president and chairman of the Capital Markets Development Council.

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