Underwriter (lending)
The underwriter is in banking in syndicated loans as lead an obligation to completely take over a particular issue size or to provide certain loan amount in full, regardless of whether and to what extent underwriters the consortium will participate.
General
A syndicate agreement is generally only legally effective when the lead manager and the issuer or borrower have agreed on a final contractual text and the other syndicate banks have agreed to this contract. There is a risk for the issuer or borrower that the calculated issue or credit volume will not be reached. In order to free the issuer or borrower from this risk, there is the instrument of underwriting.
The underwriting commitment is the obligation of the planned lead manager (if there are several, corresponding to the “joint underwriting commitment”) to the issuer or borrower to assume the entire issue or credit volume. The issuer or borrower would like to rely on the bank promise and not wait to see whether and to what extent other syndicate banks participate, as is the case with the "best effort" consortium. With his obligation, the underwriter assumes the risk that an issue can be placed or syndicated with syndicated banks.
Legal bases
In the case of underwriting, the syndicate leader makes a binding commitment to the issuer or borrower to accept the entire issue volume or to provide the entire loan amount from its own funds if its efforts to win over other syndicate banks for the issue or the loan fail in whole or in part should. This obligation can be linked to the condition that it only applies in the event that an underwriting or credit agreement is legally binding. Further conditions can be a significant deterioration in the financial situation of the issuer or borrower ( material adverse change ), force majeure or market disruption .
From a regulatory point of view, issues are referred to as "guarantees and warranties assumed for the takeover of interest-rate or share price-related securities" ( Section 298 (2) SolvV) and an allocation to the trading book is required, provided there is no intention to hold a position (then banking book ). This trading book position is to be backed by equity with an increasing percentage; the percentage increases the longer the position is held.
The regulatory designation as “guarantee” is wrong because under civil law these are not real guarantees. The consortium leader does not act as a guarantor under civil law; Rather, according to the prevailing opinion, it is a purchase contract with elements of business management (e.g. stock market listing). The underwriting of issues is an issuing business within the meaning of Section 1 Paragraph 1 Clause 2 No. 10 KWG; in the case of loans, the loan amount promised in underwriting applies.
species
Underwriting is typical in the issuing business. Underwriting is particularly useful for share issues because a capital increase can only be entered in the commercial register when all shares have been subscribed. But bonds from issuers with good credit ratings are also accepted in underwriting in liquid markets, even if the underwriter's placement power is insufficient but he is convinced that sufficient syndicates can be found for this.
Revolving Underwriting Facilities (RUFs) are the most important sub-form of Note Issuing Facilities (NIFs). Here, the underwriter takes on the medium to long-term obligation to purchase Euronotes at a certain interest rate if the issuer is unable to issue the Euronotes at this or a lower interest rate.
In the lending business, underwriting occurs in particular when the borrower's creditworthiness is excellent and the lead manager can be sure that he can “syndicate” the majority of the syndicate banks and only keep a reasonable share (“final hold”).
Best effort
The issuers or borrowers of the "best effort" consortium do not easily benefit from the planned issue volume or the desired loan amount. In contrast to underwriting, as part of a “best efforts” offer, the lead manager only undertakes to do his best to syndicate the issue or the loan. Here, too, the reservation of a final contract conclusion applies. If it is completely or partially impossible for the syndicate leader to find enough syndicates, he can withdraw from the final conclusion of a contract without compensation or the issuer / borrower is satisfied with the volumes achieved. Legally, the issuing business is a commission contract and, in terms of supervisory law, a mere issuing consortium, which is defined as finance commission business in Section 1 (1) sentence 2 no. 4 KWG.
Spread of risk
With the “underwriting commitment”, the underwriter takes the risk of having to book a higher own contribution than originally planned if the syndication is unsuccessful; in the worst case, he has to keep the entire volume in stock. Conversely, the issuer or borrower can safely calculate with the planned volume.
This risk for the underwriter can be avoided with the "best effort" offer, because the issuer or borrower must accept the syndicated volume achieved (a lower or even higher than the planned issue or loan amount is possible; so-called "under-" or "oversubscription" "). "Best effort" is therefore a minimalist syndication offer from an underwriter if it is uncertain whether the desired syndication volume can be achieved at all.
Strategically, syndicate leaders will prefer the "best effort" variant if the ratings of the issuer or borrower are not attractive enough to convince other syndicate banks to participate in the consortium. This also applies to difficult capital market situations such as during the financial crisis in 2007 .
Individual evidence
- ↑ Takeover of consortium quotas
- ↑ to be deducted are all syndicate shares that are obligatory for the consortium banks, so that only the net position has to be backed with equity
- ↑ Ulrich Bosch, in: Thorwald Hellner / Stephan Steuer, Bankrecht und Bankpraxis , marginal no. 10/68 to 10/70
- ↑ Dorothee Einsele, Banking and Capital Markets Law, National and International Banking Transactions , 2006, p. 318
