Definition
A placed deal refers to a financing arrangement where a bank, or a consortium of banks, agrees to market an entire new issue of bonds or similar securities on behalf of a borrower. The key distinction in a placed deal is that unlike in a [*bought deal], the financial success of the new issue is not guaranteed by the underwriters. This means that the financial institutions involved undertake the risk that the securities may not be fully sold in the market.
Etymology and Usage
The term “placed” in this context is derived from the placement of securities within the market — essentially trying to find a “home” for these new issues. It’s a bit like real estate for finances; instead of houses, you’re trying to sell securities.
Risks and Benefits
Risks
In a placed deal, the risk of market receptivity primarily falls on the issuer since there’s no guarantee from the underwriters that the securities will sell. It’s a bit like throwing a party and hoping guests show up — you’ve done all the preparations, but you can’t be certain of the turnout.
Benefits
For issuers, particularly smaller financial entities such as [*merchant banks] who may not have extensive marketing resources, placed deals can be less costly in terms of underwriting fees. They’re somewhat akin to a “do-it-yourself” project in home improvement; it might be challenging, but it’s gratifying and potentially less expensive if done right.
Comparison to Bought Deals
In contrast to placed deals, bought deals involve a situation where a bank or consortium outright purchases the entire issue from the issuer, thereby assuming all the associated risks. Think of it as buying all the seats for a concert in advance; the original organizer gets paid regardless of whether the audience shows up or not.
Related Terms
- Bought Deal: A securities offering where the underwriters purchase all issued securities and then resell them to the public.
- Underwriting: The process through which an underwriter brings new securities to the market, involving risk assessment and pricing.
- Merchant Banks: Specialized financial institutions focusing on commercial loans and underwriting, not typically having large retail presence.
Suggested Books
- “The Bond Book” by Annette Thau - A comprehensive guide to everything bonds, from buying to selling.
- “Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions” by Joshua Rosenbaum & Joshua Pearl - Insightful for understanding complex financial structuring, including placed deals and bought deals.
With placed deals, the financial world often sees bravery meeting opportunity. These deals prove that even smaller players can swim in the big pond, provided they’re ready to spread their wings—or in financial terms, their prospectuses. Dive deep into your financial literacy and keep afloat in this vast ocean of opportunities.
