A “Placed Deal” is a transaction in the financial sector where a bank or a group of banks markets an entire new issue of bonds or similar securities. Unlike a bought deal, the borrower is not guaranteed that the new issue will be successful. These transactions are typically favored by smaller financial institutions, such as merchant banks, which do not have large marketing departments.
By Type of Securities
By Institution
- Merchant Banks: Specialized banks focused on international finance and the underwriting of large transactions.
- Investment Banks: Larger institutions that may also engage in placed deals as part of their service offerings.
How Placed Deals Work
In a placed deal, a borrower (typically a corporation or government entity) seeks to raise capital by issuing bonds or other securities. They engage a bank or consortium of banks to market these securities to potential investors. Unlike bought deals where the banks purchase the entire issue and resell it, in placed deals, the banks act as intermediaries without guaranteeing the sale.
Risk
The primary advantage for banks is that they do not bear the full risk of the issue not being fully subscribed. However, the borrower takes on more risk, as there is no guarantee that the entire issue will be sold. This type of deal is particularly useful for smaller financial institutions that lack the capacity for a full-scale marketing effort.
$$ P = \frac{C}{(1 + r)^1} + \frac{C}{(1 + r)^2} + ... + \frac{C + F}{(1 + r)^n} $$
Where:
- \( P \) = Price of the bond
- \( C \) = Coupon payment
- \( r \) = Discount rate (yield)
- \( F \) = Face value
- \( n \) = Number of periods
Importance
- Risk Management: Helps smaller banks manage risk by not guaranteeing the sale.
- Capital Raising: Essential for borrowers needing to raise capital efficiently.
- Market Expansion: Encourages participation from smaller financial institutions.
Applicability
- Corporate Financing: Used by companies to raise debt.
- Government Projects: Used by governments for funding public projects.
- Institutional Investment: Attractive to institutional investors looking for new opportunities.
Corporate Example
A mid-sized tech company engages a merchant bank to market its new $50 million bond issue. The merchant bank does not guarantee the issue will sell out, but it successfully markets the issue to a group of institutional investors who subscribe to the bonds.
Government Example
A local government uses an investment bank to market a new municipal bond to raise $20 million for infrastructure projects. The bank does not buy the entire issue but instead markets it to potential buyers like pension funds.
- Bought Deal: A scenario where a bank buys the entire issue of new securities and resells them.
- Underwriting: The process by which a bank commits to buy the securities.
- Book Building: A process of generating, capturing, and recording investor demand for an issue.
Placed Deal vs. Bought Deal
- Risk: In a placed deal, the risk lies with the borrower, whereas in a bought deal, the risk is on the bank.
- Guarantee: Bought deals come with a guaranteed sale, whereas placed deals do not.
- Applicability: Placed deals are more common with smaller institutions, while bought deals are often seen with larger banks.
FAQs
What is a placed deal?
A placed deal is when a bank markets a new issue of securities without guaranteeing the sale.
How does it differ from a bought deal?
In a bought deal, the bank guarantees the sale by purchasing the entire issue upfront, whereas in a placed deal, the bank only markets the issue.
Who uses placed deals?
Smaller financial institutions like merchant banks commonly use placed deals.
Why choose a placed deal?
It allows institutions to manage risk better and provides flexibility in capital raising.