Bought Deal

A bought deal is a securities financing in which one or more underwriters agree to purchase an issue from the issuer on a firm-commitment basis before completing the resale to investors. The technique is particularly associated with Canadian capital markets, where prospectus rules permit limited pre-marketing after a qualifying bought-deal agreement is signed and announced.

The underwriters commit capital before they have completed the investor book. This gives the issuer earlier price and proceeds visibility while exposing the underwriters to demand and market-price risk. The agreement can still contain permitted closing conditions and termination rights, so “bought” does not mean an unconditional closing under every circumstance.

Key Takeaways

• A bought deal is a form of firm commitment underwriting.
• The underwriters agree on the security, amount, and purchase price before completing the investor distribution.
• The issuer transfers substantial resale risk but may accept a price discount for speed and certainty.
• The underwriters’ gross spread is not guaranteed profit; inventory losses and distribution costs matter.
• Bought-deal marketing and prospectus rules are jurisdiction-specific.

How a Bought Deal Works

The issuer and lead underwriter negotiate the amount, security, price, underwriting discount, conditions, and timetable. Once the qualifying agreement is signed, the issuer announces the financing and follows the required prospectus process. The lead underwriter may invite other dealers into a syndicate and market the securities to eligible investors.

At closing, the underwriting group purchases the contracted securities from the issuer. Investor allocations and settlement then transfer the distributed securities to buyers. A dealer that retains unsold securities remains exposed to subsequent price and liquidity changes.

This is not simply an auction to the highest bank bidder. An issuer may compare competing proposals, but it also evaluates execution capacity, distribution reach, conditions, fees, due diligence, and certainty that the underwriting group can fund.

Worked Example

Assume a listed company announces a bought deal for 12 million shares at a public price of $20. The underwriting group agrees to purchase the shares from the issuer at $19.20 each.

• Public offering size: 12 million x $20 = $240 million
• Purchase price paid to the issuer before its other expenses: 12 million x $19.20 = $230.4 million
• Gross underwriting spread if all shares are resold at $20: 12 million x $0.80 = $9.6 million

If the underwriters retain 3 million shares and later sell that block at $18.50, the sale price is $0.70 below their $19.20 purchase cost. That block creates a $2.1 million loss relative to purchase cost, before considering profits on other allocations and all transaction expenses.

Bought Deal vs. Fully Marketed Offering

Both can end as firm-commitment underwritings. The distinction concerns the timing and regulatory path of the commitment, not whether investors receive risk-free securities.

Why Companies Use Bought Deals

An issuer may value speed when markets are volatile, a refinancing deadline is near, or an acquisition requires funding certainty. Earlier pricing can reduce the issuer’s exposure to a market decline while the offering is marketed. The trade-off may be a larger discount or more protective terms for underwriters who commit without a completed order book.

Existing shareholders should assess dilution, use of proceeds, pricing discount, and whether pre-emption protections apply. A fast transaction can limit the practical opportunity for non-participating holders to maintain their ownership percentage.

How to Evaluate a Bought Deal

1. Confirm that the agreement is a firm commitment and identify every purchase condition.
2. Compare the underwriters’ purchase price with the public price and unaffected market price.
3. Calculate gross and net proceeds after the spread, issuer expenses, and any over-allotment option.
4. Identify the lead underwriter, syndicate members, and each member’s commitment.
5. Review use of proceeds, dilution, selling restrictions, lockups, and expected closing date.
6. Distinguish a base deal from any permitted increase or over-allotment option.

Risks and Limitations

• Issuer pricing risk: Certainty may be purchased through a discount that proves larger than necessary if demand is strong.
• Underwriter inventory risk: Weak demand or a price decline can create losses on retained securities.
• Execution risk: Regulatory review, issuer conditions, or contractual termination events can still prevent closing.
• Dilution: New equity increases the share count and can reduce non-participants’ ownership percentage.
• Aftermarket risk: A completed bought deal does not ensure stable prices or secondary-market liquidity.

Authoritative Source

The Ontario Securities Commission’s current companion-policy guidance on prospectus requirements explains that the bought-deal accommodation is intended to facilitate financing certainty and requires underwriters to agree to purchase on a firm-commitment basis. It also discusses limits on market-out, upsizing, confirmation, amendment, and termination provisions.

Related Terms

• Firm Commitment Underwriting: The purchase obligation at the core of a bought deal.
• Book Building: The process of collecting investor demand and informing allocations.
• Placing: Targeted distribution to selected investors, which does not itself define the purchase commitment.
• Rights Issue: A shareholder-first financing method with different allocation mechanics.
• Share Dilution: A key effect when the bought deal involves newly issued equity.

FAQs

This page is educational and does not provide securities-offering, legal, tax, underwriting, or investment advice.