Primary Market - Syndicate Pricing and Underwriting

Pricing and Underwriting Practices

On the primary market, borrowers may entrust syndicates with the task of trading their bonds. Syndicates consist of large investment banks that agree to purchase the entire bond issue from the borrower and resell it to investors. In this way, the issuer avoids the risk of being left with unsold securities.

Fees and Expenses
Syndicate members buy the issue from the borrower at a discount. This discount represents the par value of the issue minus the underwriting fees. In this way, they make a profit when they sell the issue to investors at par.

The underwriting fees of a new bond issue can be flexible or fixed, depending on the type of deal and the market. Underwriting fees usually consist of:

1. Management Fee
2. Selling Concession
3. Underwriting fee
4. Legal Cost
5. Printing Cost

Practices for pricing and underwriting a new bond
When pricing and underwriting a new bond issue, there are a number of practices followed by the syndicate members.

• Traditional open pricing
• Bought deal
• Pre-priced deal
• Fixed price re-offer
• Pot deal
• Price stabilization

Traditional Open Pricing

In traditional open pricing, the underwriters have the ability to change the price and coupon any time up to the offering day – the day the bond is put on the market. This is to minimize any losses due to changes in market sentiment during the subscription period – i.e., the period from announcement day to offering day.

After analyzing the 'book', if it is found that there is more demand for the issue than supply, the price or coupon can be changed in the issuer's favor. If, prior to the offering day, the issuer is unhappy with pricing, the issue can be canceled.


Bought Deal
A bought deal is an offering in which the underwriters or syndicate purchase the entire bond issue and resell it. This only happens if underwriters are confident they can sell the bonds. The Eurobond market often operates on the bought deal basis.

The issuer approaches issuing houses giving details of the type of issue it wants and requesting bids at a fixed price. The period between the request and having to submit a bid is normally only a few hours.

After a bid has been accepted, the issuing house is the legal owner of the issue and is obliged to purchase the issue from the borrower at the quoted fixed price, even if market conditions change.


Often with the bought deal, the lead manager – usually a large global securities house – doesn't syndicate the issue. Instead, it places the entire issue itself. If it does syndicate the deal, it quickly spreads the risk between syndicate members. This process has made the market for new issues extremely competitive and concentrated.

In the case of the bought deal, there is no flexibility in the pricing of the issue during the subscription period. Fear of adverse market conditions can also result in the subscription period being brought forward.


Pre-Priced Deal
A pre-priced deal is very similar to a bought deal. In a pre-priced deal, the price is agreed between the underwriter and the borrower immediately prior to launch.

The issue is then syndicated in the same manner as an open priced issue except that there is generally no, or only a very short selling period.

Fixed Price Re-offer
Fixed price re-offer refers to a syndicate discipline, strongly enforced on the US market, where the underwriting banks agree to sell bonds to investors at no less than an agreed price. This method is mainly used to sell large issues to institutional investors.

The fixed price is usually maintained for 24 hours after the offering. This practice ensures transparency in the primary market – investors are assured that they cannot get the bonds cheaper from another dealer while the issue is in syndication.

For the issuer, the fixed price re-offer method has the advantage of lower underwriting fees.

Price Stabilization
Lead managers support trading in the primary market immediately after the offering. The issue price is stabilized using a stabilization fund that is taken account of in the fees charged to the issuer. The lead manager will buy back bonds that are under selling pressure and sell bonds to the market when there is excess demand.

The issue is only allowed to move within a certain price range over a given period. In order to achieve this, the lead manager allots bonds to the syndicate, either in excess of or falling short of the full issue amount.

By over-allotting the issue, going short, the lead manager must buy back bonds from the market to cover the short position. By going long, the lead manager will hold the remaining bonds for sale in the secondary market to satisfy excess investor demand. Through these activities the price is stabilized.