DIRECT PLACEMENTS (Discussion)

Abstract

MR. CONKLIN'S PAPER builds upon and extends the analyses of direct placement made in the other three leading studies of recent years which are referred to by him: the article by Harold Fraine of the University of Wisconsin, published in the Journal of the American Association of University Teachers of Insurance in March, I949; the paper by Frazer Wilde of the Connecticut General Life Insurance Company, which appears in the I950 Proceedings of the American Life Convention; and the article by Raymond Corey of Harvard University in the November, I950, issue of the Harvard Business Review. I shall comment briefly on only a few of the points dealt with in one or more of these four papers. All four writers agree that the costs of flotation are less iii direct placement than in a public offering. Mr. Conklin has gone farther than the others in attempting to quantify the savings in direct placement and the possible allocation of these savings. On the basis of limited data, he concludes that the reduction in flotation costs can be expressed as a saving in effective interest cost of from three to six yield basis points, with the probable average closer to three than six, especially in the case of large public utility issues. Thus, if a borrower could sell publicly a bond issue at a price that would give it a cost of 3.00 per cent after payment of flotation costs, it could reduce its cost to 2.97 per cent by a direct placement, if it could be sure of obtaining as high a price in a direct placement as in a public sale. There are two elements in this contingency. In the first place, to what extent are the lender's costs greater in a direct placement than in the purchase of an issue from an underwriter and how far, therefore, must the lender lower its bid price to cover these additional costs? Secondly, to what extent will bargaining and alternative sources of funds affect the distribution of the savings of direct placement between borrower and lender? Mr. Conklin has considered the latter of these questions in some detail-; the former he has touched upon only lightly. With respect to the first of these questions, an insurance company might find that it cost enough more to make a direct loan so that it would be required, if it insisted on recovery of its costs, to lower its