Syndicate and Syndicate Loans
general, any joint venture; a temporary association of parties for the
financing and execution of some specific business project.
The UNDERWRITING syndicate is a group of investment banking houses,
or broker-dealer firms, that organize to underwrite an issue from a corporation
or governmentality, as distinguished from a single underwriter.
The public offering and sale of relatively small aggregate issues
might be accomplished by a single investment banking firm, the "originator";
but when the size of the issue is large, involving substantial risk and
tie-up of the single originating firm's available capital and credit and
requiring more selling power than the single firm can provide, the originating
firm invites other investment banking firms to join it in functional syndicates.
Following are the types of syndicate agreements.
1. Purchase agreement, the contract between the issuer and the purchase group of firms, a material provision of which is the agreement by the issuer to sell to each of the members of the purchase group and the agreement by the latter to buy their specified proportions of the total underwriting.
Purchase group agreement (agreement among the underwriters), which not
only repeats the participation liability of each member firm found in
the purchase agreement but also authorizes the syndicate manager, acting
for the purchase group, to place the "give-up" portion through selected
other firms in the selling group at a concession and to institutional
investors directly at the public offering price.
Selling group agreement ("offering to selected dealers") between the syndicate
manager, acting for the purchase group, and the invited dealers, mobilized
thereby for greater distributive power for expeditious sale of the entire
issue. Members of the purchase
group, to the extent of their "take-down", also distribute at retail to
passage of the Securities Act of 1933, with its registration procedure
for public offerings and a waiting period until the effective date for
public sale of 20 days or more, introduced a greater degree of risk in
underwritings of the firm commitment type (including the standby type).
Thus, the purchase agreement now conventionally includes a "market
out" or escape clause. This
provides that the purchase contract may be terminated by the representative
firm (originator acting on behalf of itself and other purchase group members
aggregating 50% or more participation):
"(a) if, prior to the time the post-effective amendment [to the
registration statement] shall become effective, the market value of securities
in general, or political, economic or financial conditions shall have
so materially changed as in the judgment of the representative to render
it inadvisable to proceed with such public offering; or (b) if, prior
to the closing date [settlement with issuer for agreed proceeds of sale],
the company shall have sustained a material and substantial loss by fire,
flood, accident or other calamity which in the judgment of the representative
shall render it inadvisable to proceed with the delivery of the securities,
whether or not such loss shall have been insured."
Although this might seem to impair the binding nature of liability,
in practice it is rarely invoked even when market conditions become unstable,
because of the natural desire of the purchase group to have a satisfied
issuer client. The purchase
agreement is also contingent upon the registration statement's reaching
the effective date so that the securities may validly be publicly sold.
Purchase Group Agreement.
is the joint venture proper of the underwriting firms involved, covering
such points at the liability of each participant ("several" liability
conventionally in use limits liability of each participant to its agreed
share of the total issue) and the appointment of the syndicate manager
(usually from the originating firm) and granting of authority and discretion
thereto in management of the syndicate on such matters as amount of give-up,
formation of selling group and concession thereto from public offering
price, necessary stabilization operations, termination or extension of
the offering date, details of payment and delivery, manager's fee, and
legal clauses such as indemnification, representations, and warranties.
Selling Group Agreement.
huge public offering might involve a relatively few members of the purchase
group and hundreds of members of the selling group located throughout
the country and abroad. The
syndicate manager, pursuant to the purchase group agreement, selects the
selling group members and their allocations at the dealers' concession
specified. Since no public
offering of the issue may be made before the effective date, the selling
group agreement and the final prospectus are sent to the dealers on the
effective date, for acceptance of the allocation, which is subject to
prior sale. It is often provided
that the concession to the dealer will be withheld, or the shares returned
to the dealer, with respect to any shares that the manager has had to
purchase in stabilization operations (they may be traced to the dealer
who was supposed to have sold them effectively).
It is also conventionally provided that the selling group dealer
in turn may make a specified "re-allowance" (portion of his own concession)
to other dealers not members of the selling group.
total underwriting spread (difference between public offering price and
net price to the issuer) will be distributed three ways:
the management fee to the syndicate manager, the underwriting share
(purchase group), and the selling commissions (selling group's concession).
Expenses of the offering, some of which the issuer may specifically
agree to bear in the purchase agreement, are deducted before making the
Competitive Bidding Practice.
above procedure refers to conventional underwriting by private negotiation.
Competitive bidding, which is required for public utility issues
under the Public Utility Act of 1935 (pursuant to rule of the Securities
and Exchange Commission) and for railroad securities (pursuant to the
rule of the Interstate Commerce Commission), necessarily affects the procedure
for syndicates. The process
begins with the issuer's "statement of terms and conditions" and invitation
for bids. (Some firms begin
even sooner - as soon as the prospective financing is "firm" enough -
so as to form strong syndicates.)
The major firm forming the syndicate invites other firms to become
members and confirm; a "major" participation would be one equal in size
to that of the manager and participation would be one equal in size to
that of the manager and of any other member, minor participations ranging
downward there from. Before
the effective date, the issuer stages "briefings" for the interested groups
and supplies documentary and descriptive data.
Each group in turn has meetings among its member firms, who a few
days before submission of the bid execute and sign the agreement among
such prospective purchasers, specifying participation (which may be increased
by 10% without special agreement, usually, to allow for "dropouts"), appointment
of the manager and determination of his fee, sharing of expenses whether
or not the bid wins, the authorization of stabilization operations by
the manager if the bid is successful, etc.
final meeting of the bidding group is usually held on the very morning
of the day specified by the issuer for submission of bids, so that the
bid may reflect the latest market conditions.
Submission of the bid makes possible determination by the manager
of the selling concession to dealers and the public offering price.
Subject to the terms and specifications of the issuer, the winning
bid is determined, usually on a "lowest cost of money" basis to the issuer.
The successful group's manager then swings into action for distribution
through the selling group and directly to institutions, and bidding group
firms are allocated their "take-downs."
The first act by the manager is to sign the purchase contract with
the issuer, on behalf of the winning group, provisions of which were previously
furnished to prospective bidders by the issuer for information.
Impact of "Shelf Registration."
415 of the SECURITIES AND EXCHANGE COMMISSION under the Securities Act
of 1933, adopted for a nine-month trial period on February 24, 1982, called
for a corporate issuer to file a single S-3 registration to cover the
total amount of securities it will put "on the shelf" for issuance in
the next two years. Since
the traditional underwriting firm that has handled the corporation's offerings
on a negotiated basis in the past is not specified, it is expected that
despite the traditional ties, fiercer competition for the business from
other underwriting firms may develop and/or the corporation may more readily
change its traditional underwriter ("originating" underwriter).
Banks as Underwriters.
to the BANKING ACT OF 1933, banks may underwrite only
participated in by multiple banks and other institutions where the overall
credit involved exceeds an individual lender's legal lending or other
limits. One bank in the syndicate
usually acts as agent for the other institutions.