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.
Historical Context
Placed deals have been an integral part of the financial markets for decades, providing smaller financial institutions with a mechanism to raise capital for their clients without taking on the full risk of the issuance themselves. The concept became more prevalent as the bond markets expanded and the need for diverse financing options grew.
Types/Categories
By Type of Securities
- Corporate Bonds: Debt securities issued by corporations.
- Government Bonds: Debt securities issued by governments.
- Municipal Bonds: Debt securities issued by local government entities.
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.
Key Events
- Initial Proposal: The borrower proposes to raise capital through a new issue.
- Mandate Agreement: A bank or group of banks agree to market the issue.
- Marketing Period: The securities are marketed to potential investors.
- Subscription and Allocation: Investors subscribe to the issue, and allocations are made.
- Closing: The transaction is finalized, and securities are issued.
Detailed Explanations
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 and Reward
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.
Mathematical Formulas/Models
Simple Bond Pricing Formula
Where:
- \( P \) = Price of the bond
- \( C \) = Coupon payment
- \( r \) = Discount rate (yield)
- \( F \) = Face value
- \( n \) = Number of periods
Charts and Diagrams
Mermaid Diagram for Placed Deal Workflow
graph LR
A[Borrower] -->|Propose Issue| B(Bank/Consortium)
B -->|Market Securities| C(Investors)
C -->|Subscribe| D(Allocation)
D -->|Issue Securities| E[Borrower]
E -->|Receive Funds| A
Importance and Applicability
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.
Examples
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.
Considerations
- Market Conditions: The success of a placed deal can heavily depend on prevailing market conditions.
- Investor Appetite: The demand from investors for new securities.
- Credit Rating: The borrower’s creditworthiness impacts the attractiveness of the issue.
Related Terms with Definitions
- 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.
Comparisons
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.
Interesting Facts
- Historical Significance: Placed deals have allowed many smaller institutions to compete with larger banks in capital markets.
- Diverse Participation: Encourages a wider range of investors to participate in new issues.
Inspirational Stories
Story of a Successful Placed Deal
A small renewable energy company needed funds to expand its operations. A local merchant bank marketed its bond issue, and despite initial skepticism, the issue was oversubscribed, enabling the company to fund its projects and drive significant growth.
Famous Quotes
- John Maynard Keynes: “Successful investing is anticipating the anticipations of others.”
- Warren Buffett: “Risk comes from not knowing what you’re doing.”
Proverbs and Clichés
- “Don’t put all your eggs in one basket.” - Highlighting the importance of diversified investment.
Expressions, Jargon, and Slang
- “Going to market”: The process of issuing new securities.
- [“Bookrunner”](https://financedictionarypro.com/definitions/b/bookrunner/ ““Bookrunner””): The bank responsible for leading the deal.
FAQs
What is a placed deal?
How does it differ from a bought deal?
Who uses placed deals?
Why choose a placed deal?
References
- Fabozzi, Frank J.: “Bond Markets, Analysis, and Strategies”.
- Mishkin, Frederic S.: “The Economics of Money, Banking, and Financial Markets”.
Summary
Placed deals play a crucial role in the financial sector by allowing smaller banks and financial institutions to participate in the capital markets. By marketing new issues of bonds without guaranteeing their sale, these deals provide a flexible and risk-managed approach to raising capital. Understanding placed deals can benefit both issuers and investors by providing an alternative mechanism for financing and investment.
