An underwriter is an investment banking firm that purchases bonds directly from the bond issuer and resells them to investors.
A syndicate is a temporary alliance of underwriters led by a senior manager who coordinates the bond sale. There are two types of syndicates: Eastern/undivided accounts and Western/divided accounts.
The underwriter's spread is the profit made by the underwriters. It is equal to the difference between the price the underwriters pay the issuer for the bonds and the price the underwriters receive from the resale of those bonds to investors.
A selling concession is an arrangement between syndicate and non-syndicate underwriters to sell bonds.
The senior manager closes down the syndicate by preparing bond certificates and re-offering terms, distributing profits, and issuing the final statement.
An underwriter is a firm, or group of firms, that purchases bonds directly from a bond issuer and resells them to investors. Underwriters are intermediaries between issuers and investors. Most investors cannot afford to buy whole bond issues from an issuer and most issuers do not have the time or resources to market bonds to multiple investors. Underwriters fill the void in the marketplace by purchasing whole bond issues and then reselling them, ideally for a profit, to investors.
A syndicate is a temporary alliance of underwriters who purchase bonds from the issuer under the direction of a senior or lead manager who directs the syndicate and coordinates the bond sale. Syndicates vary in size, depending on the amount of the issue and the ease with which it will sell. Syndicates are often made up of both large national underwriters such as Goldman Sachs or Merrill Lynch, along with smaller underwriters located in the state or region where the bonds are being issued.
Syndicates usually consist of firms that specialize in sales to institutional investors, such as pension or mutual funds, as well as firms that sell primarily to individual investors. Most syndicates last about 30 days, although it can be shorter if the bonds sell quickly.
There are two types of syndicates: Eastern or undivided, and Western or divided accounts. Eastern accounts are the most common type of syndicate. In this format, members of the syndicate must sell a specific, preset percentage of the bond issue. However, if for any reason there are bonds left unsold by a particular member of the syndicate, all of the other members are responsible for a percentage of the unsold amount. For example, if an underwriter agreed initially to sell 20% of the bond issue, it would be responsible for 20% of any unsold portion. The account is "undivided" in terms of selling and liability.
In contrast to the Eastern account form is the less commonly used Western account form of syndication. The Western form requires a syndicate member to sell only its obligated percentage of the issue and does not hold members responsible for other's unsold bonds. Firms in Eastern account syndicates are forced to work together as a team to sell the entire issue, whereas firms in Western account syndicates are more independent and at greater risk if their bonds go unsold.
The profits made by syndicates and individual underwriters are referred to as the spread. The amount of the spread depends on the a variety of factors, but is primarily based on the size of the issuance and market conditions at the time of the sale. The spread is the difference between the price the underwriter pays the issuer for the bonds and the price the underwriter receives from the resale of those bonds to investors.
The spread can be calculated by basis points or "dollars per bond". One percent of the bond issuance equals 100 basis points. For example, an underwriting spread of 100 basis points or $10 per $1000 bond would equal 1% of the principal amount of the bonds. On a $10 million issue, the spread would be $100,000.
For both competitive and negotiated bids, the spread is made up of four separate components: the management fee; expenses; the underwriting fee; and the takedown.
It is common for an underwriter who is not a member of the syndicate to have a client who wants to purchase bonds from the bond issue. The non-member underwriter will buy the bonds from the syndicate for its customer. The non-member underwriter's profit is known as the selling concession, and is taken out of the underwriter's takedown. For example, if the takedown is 50 basis points, and the selling concession is 25 basis points, the member of the syndicate makes 25 basis points ($2.50) and the non-member also makes 25 basis points ($2.50).
For most bond issuances, approximately a month elapses between the time the issue is sold and when the bonds are physically delivered. During this interim period, the senior manager of the syndicate has to close down the operation. The bond certificates are printed with the final legal opinion on the back.
A letter is sent out to the members of the syndicate describing the re- offering terms, which include the spread, takedown price, and selling concessions. When the bonds are ready to be delivered, all payments are settled. In order to pay the issuer, the senior manager arranges for a loan from either a commercial bank outside of the syndicate or a member of the syndicate which is also a bank.
The secured loan is used to pay the issuer. The bonds are then distributed to the members, who fill their orders and send the payments to the senior manager. Once the manager has received all the payments from the syndicate members, she retires the loan, and distributes the profits among the members of the syndicate. The last step for the senior manager is to issue a final statement of participants, expenses, and profits.
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