Private Placement Market Research Articles

The role of sponsor representatives in SEO underpricing: Evidence from China

This study examines the role of sponsor representatives in SEO underpricing using a sample of private placements issued by Chinese firms covering the period 2007–2021. We find a robust negative relationship between private placement underpricing and qualified sponsor representatives who recommend the private placements, indicating that sponsor representatives provide high-quality services and in turn enhance the pricing efficiency of private placement market. This relationship is more pronounced for private placement issues that have higher financial distress, greater information asymmetry, and are located in weaker business environment. And the role of sponsor representatives is enhanced after China's registration system reform and issue-pricing rules revision.

(TSX Private Markets and its Potential Application in Saudi Arabia)

Arabic Abstract: يهدف البحث إلى استطلاع آليات عمل سوق جديدة دشنتها سوق تورينتو المالية في مارس 2014م وهي سوق الطرح الخاص (TSX Private Market) وتقييم إمكانية تطبيقها في البيئة السعودية لتسهيل حصول المنشآت الصغيرة والمتوسطة (المدرجة وغير المدرجة) على التمويل من خلال ربطها بالمستثمرين المحتملين، وتوفير آلية لتداول وتسوية الأوراق المالية التي تتولد في هذا السوق. ويركز البحث بشكل خاص على استكشاف إمكانية إنشاء سوق طرح خاص لمنتج التحوطي للتمويل بالمشاركة الذي ابتكره تاج الدين (2011ب) لتمويل المنشآت الصغيرة والمتوسطة في قطاعات الصناعة والبناء والتشييد. وقد خلص البحث إلى توافر البيئة التنظيمية والتقنية المواتية لتأسيس سوق طرح خاص في المملكة، وأن السوق تنسجم مع مبادرات رؤية المملكة العربية السعودية 2030 التي تستهدف زيادة إسهام هذه المنشآت في الناتج المحلي الإجمالي. كما توصل البحث إلى إمكانية تحوير سوق الطرح الخاص في المملكة لتوفير التمويل المحمي بعقود الاستصناع التحوطي، التي تعتمد عليها شريحة كبيرة من المنشآت الصغيرة والمتوسطة في المملكة. English Abstract: The paper aims to explore new Private Market introduced by the TSX in March 2014 and to evaluate its applicability in the Saudi environment to facilitate the access of SMEs (listed and unlisted) to finance by linking them to potential investors. In addition, the market can operate an OTC market to trade the securities issued in this market. In particular, the paper investigate the possibility of establishing a similar private placement market for hedged Istisna'a product proposed by Tag El Din (2011) to finance SMEs in the manufacturing and construction sectors. The paper concluded that Saudi regulatory and technical environment is capable to establish the proposed private market in Saudi Arabia, which reinforce the initiatives of Saudi 2030 Vision to increase the contribution SMEs to GDP. The paper also asserted that private market in the Kingdom could be adapted to finance secured by hedged Istisna'a contracts that is urgently needed by a large segment of SMEs in the Saudi economy.

WAITING FOR THE CAPITAL MARKET UNION: THE POSITION OF LATVIAN CORPORATE BOND MARKET

Baltic region is traditionally treated as similar and comparable when analysed on the macroeconomic level. The major difference is faced when the analysis is performed for the corporate bond market – the weight of Latvian publically traded corporate bonds among the three countries- Latvia, Lithuania and Estonia- reached 94% by the number of issues quoted. With 47 corporate bonds listed in Nasdaq Riga, Latvian corporate bond market demonstrated the rapid growth and recognition of corporate bonds as the source of alternative to bank lending financing method (Nasdaq Baltic, 2017). There are no obvious macro or microeconomic evidence for Latvia meeting more favourable conditions for corporate bond market development than Lithuania and Estonia The increasing role of the capital market as the alternative to the traditional to Europe banking sector is strongly supported by the European Commission (EC). In 2015 the EC announced the Capital Market Union (CMU) initiative and respective action plan as the reaction to the challenges faced by both banking sector and small and medium enterprise (SME) segment in Europe. As integrated and more diverse capital markets will decrease the cost of funding for companies, the objective of the CMU is to make the financial system more resilient in all 28 Member States including Latvia, Lithuania and Estonia (European Commission, 2017). While several steps like proposal to modernise the Prospectus Directive have been made, further actions based on the review of regulatory barriers to SME admission on public markets and SME growth markets and review of European Union corporate bond markets, focusing on how market liquidity can be improved made in 2017 will follow (European Commission, 2015). The aim of this article is to analyse the level of development of the biggest Baltic corporate bond market- Latvian corporate bond segment and to reveal the potential CMU introduction effect. The paper applies Financial Sector Development Indicators (FSDI) framework developed by The World Bank (World Bank, 2004) to the country cluster as defined by Bending et al (2014). The paper relates the results to CMU action plan developed by the European Commission. The article estimates that Latvian corporate bond market is highly developed compared to the peers selected where the only lagging area is size. The article concludes that reviving securitisation, participation in European Long Term Investment Funds and developing European private placement market should be prioritised for Latvia within CMU framework.DOI: http://dx.doi.org/10.5755/j01.eis.0.11.18147

When overseeing becomes overlooking: the post-GFC reconfigurations of international finance

ABSTRACTThis article draws on empirical evidence suggesting a shift of credit provision from banks to the alternative investment fund sector to argue that current deficiencies in fund regulation have not prevented such a shift, if not actually encouraged it. The evidence is drawn from the new Pan-European Private Placement Market, and first- and second-order analyses are undertaken to show a shift of credit risk (intermediation) into the hands of US funds in particular, and a concentration of risk amongst herds of smaller funds which have the potential to act as one. The data highlight defects in the scope of the macroprudential oversight mechanisms deriving from the Alternative Investment Fund Management Directive (AIFMD). These findings form the basis for proposals to remedy AIFMD as part of the move to a Capital Markets Union.

Regulating Private Placements in China: A Principled Approach

As China’s economy continues to grow and mature, the market for private placements will also grow. Economic prosperity will result in a greater number of investors seeking investment opportunities. Prosperity will also result in the greater demand for goods and services, fueling the creation of more businesses that require capital. As China confronts this market reality, it must decide its legal response to the private-placement market. China is still in the early stages of deciding what sort of legal regime should govern its private-placement market. As it stands now, private placements in China are effectively governed by one provision in the Securities Law of the People’s Republic of China. This article explores what approach China should take in regulating its private placements. In the end, this article can provide no ultimate truths as to whether China should approach securities regulations with a heavy hand or a light one. The author recommends erring on the side of less regulation, rather than more. Whether that path is the correct one for China requires more reflection and consideration by Chinese policy-makers. For any approach Chinese policy-makers adopt to regulate private placements, they should adhere to certain principles: First, private-placement laws and interpretations must be based on a careful understanding and balancing of the costs and benefits of the proposed regulation. Second, private-placement laws must be drafted clearly and made easily accessible to the public to reduce compliance costs. Third, interpretations of laws must be intellectually legitimate – they must logically follow from the language and purpose of the law.

Quandaries Facing Securitizers in the Wake of the SEC’s Proposed Amendments to Regulation AB

The SEC announced its proposed Reg AB amendments (the “RegAB II”) dealing with the offering process, disclosure, and ongoing reporting of asset-backed securitizations on April 7, 2010. Since the comment period expired in August, the SEC has been evaluating comments it has received on its proposal, as well as working with other agencies, as required by the Dodd-Frank legislation, on various measures common to other agency proposals. Securitization participants should be on heightened awareness of the continuing development in the interagency rulemaking process. As currently written, the SEC’s proposed rules are designed to facilitate both investor and general public confidence in structured finance. This article considers the possibility of other consequences, including: • Will the proposals have an effect on the length of time it takes to bring a deal to market? • What is the effect, if any, of the proposed 5% risk retention requirement with respect to consolidation? • What might be the effect of RegAB II on the private placement market? • What are some of the considerations with respect to the proposed waterfall programming? <b>TOPICS:</b>Legal and regulatory issues for structured finance, legal/regulatory/public policy

Does Geography Matter to Bondholders?

We find that the location of corporate headquarters significantly affects the firm’s bondholders. Similar to Loughran and Schultz (2006) and others, who show that investors are better able to obtain information on nearby companies, we look at firms located in large metropolitan cities, small cities, and rural areas and find that firms located in remote rural areas exhibit significantly higher costs of debt capital (of up to 65 basis points) in comparison to their urban counterparts. Unlike other studies that focus on the role of information asymmetries in the local bias of investors and decision makers, we are able to show that firms in remote areas experience greater costs of debt capital primarily because of a greater difficulty of monitoring their activities. We find that the adverse impact of bad corporate governance on bondholders is magnified in geographically remote firms, primarily because geographic distance reduces the effectiveness of external monitoring. Consistent with that, we show that in the private placement market, where firms are closely monitored by institutional investors, location plays no role in explaining the cross-sectional variation in the cost of debt capital across companies. We also find that the passage of the 2002 Sarbanes-Oxley Act, which brought about regulatory improvements in monitoring and governance, significantly reduced the agency costs of debt in rural firms. Taken together, our results indicate that the firm’s information environment interacts with the impact of corporate governance, particularly affecting the effectiveness of external monitoring in alleviating agency problems between insiders and debt holders.

Does Geography Matter to Bondholders?

We find that the location of corporate headquarters significantly affects the firm's bondholders. Similar to Loughran and Schultz (2006) and others, who show that investors are better able to obtain information on nearby companies, we look at firms located in large metropolitan cities, small cities, and rural areas and find that firms located in remote rural areas exhibit significantly higher costs of debt capital (of up to 65 basis points) in comparison to their urban counterparts. Unlike other studies that focus on the role of information asymmetries in the local bias of investors and decision makers, we are able to show that firms in remote areas experience greater costs of debt capital primarily because of a greater difficulty of monitoring their activities. We find that the adverse impact of bad corporate governance on bondholders is magnified in geographically remote firms, primarily because geographic distance reduces the effectiveness of external monitoring. Consistent with that, we show that in the private placement market, where firms are closely monitored by institutional investors, location plays no role in explaining the cross-sectional variation in the cost of debt capital across companies. We also find that the passage of the 2002 Sarbanes-Oxley Act, which brought about regulatory improvements in monitoring and governance, significantly reduced the agency costs of debt in rural firms. Taken together, our results indicate that the firm's information environment interacts with the impact of corporate governance, particularly affecting the effectiveness of external monitoring in alleviating agency problems between insiders and debt holders.

YANKEE BONDS AND CROSS-BORDER PRIVATE PLACEMENTS: AN UPDATE

With U.S. Treasury yields near historical lows and the recent relaxation of U.S. regulatory reporting requirements, the U.S. bond markets are more and more frequently the markets of choice for international issuers. Total crossborder U.S. bond issuance is expected to top $350 billion in 2000, easily surpassing previous issuance levels. Overseas issuers have three primary forms through which they can participate in the U.S. long-term debt markets: publicly traded, SEC-registered bonds (commonly known as “Yankee” bonds); traditional private placements; and underwritten Rule 144A private placements. Each of these three financing methods has distinct benefits and limitations that should be thoroughly evaluated in light of the specific objectives of the issuer. Yankee bonds are typically the most cost efficient vehicle for large, investment grade issuers, and they are expected to account for over 75% of the $350 billion market in 2000. Second in importance is the rule 144A market, which is typically used for complex structures requiring heavy rating-agency involvement, such as future financial flow transactions and project financings. The 144A market has also become a particular favorite with international issuers because of its less formal disclosure requirements and streamlined execution process. The private placement market continues to be the dominant choice of smaller issuers, companies with complicated “stories,” and firms that do not wish to submit to regular scrutiny by rating agencies. This article provides a detailed analysis of each type of bond issuance and the issues facing a financial officer in trying to determine the most appropriate source of long-term debt.

Speed of issuance and the adequacy of disclosure in the 144A high-yield debt market

I document the shift of high-yield issuance from the public to the Rule 144A private placement market and exploit data on credit spreads to investigate whether investors regard disclosure in the two markets as comparable. The key implications of the inadequate-disclosure hypothesis are that investors require premiums on 144A securities and that such premiums are largest for first-time bond issuers and privately owned firms about whom less information is publicly available. I find that 144A premiums, though positive initially, have vanished over time, and I find no evidence of larger 144A premiums for first-time issuers or private firms. Investors do, however, require premiums of first-time issuers, and to a lesser extent of privately owned firms, regardless of whether securities are issued in the 144A or public market. These findings imply that sophisticated investors do not value the incremental information provided by securities registration, but do value ongoing disclosure.

TermoEmcali

The investment-grade-rated, build-operate-transfer (BOT) power project, nearing completion, serves the city of Cali in Columbia. It is owned by Emcali, the local utility, and Intergen, an affiliate of Bechtel enterprises. It was financed “out of the box” by Dresdner Kleinwort Benson in the rule 144A private placement market with a back-up commercial loan commitment. The project9s bonds had the longest term to date for a Colombian borrower. Among the project9s distinctive features is a bank debt-service letter of credit facility that replaces the government guarantee or power purchase commitment common in previous project financings.

Changing Leases into Investment-Grade Bonds: Financial Alchemy and Cost Reduction in Real Estate Finance

Executive Summary. Ownership of economic benefits from current leases of real property can be separated from ownership of economic benefits from future leases. The ownership interests can be securitized into assets that are independent of each other for investment purposes. Ownership of benefits from current leases can be regarded as a fixed-income asset. In the case of single-tenant property with a bondable-net lease and investment-grade tenant, the fixed-income asset is ratable based on the tenant credit rating and lease default provisions. In the case of general properties and leases, the fixed-income assets are ratable provided additional financial structure is superimposed. The fixed-income assets can be sold as corporate bond-equivalents in the private placement market to create low-cost leverage for real estate investments.

Yankee Bonds and Cross‐Border Private Placements

With credit spreads and U.S. Treasury yields near historical lows and the recent relaxation of U.S. regulatory reporting requirements, the U.S. bond markets are more and more frequently the markets of choice for international issuers. Total cross‐border U.S. bond issuance is expected to top $200 billion in 1997, easily surpassing previous issuance levels.Overseas issuers have three primary forms through which they can participate in the U.S. long‐term debt markets: publicly traded, SEC registered bonds (commonly known as “Yankee” bonds); traditional private placements; and underwritten Rule 144A private placements. Each of these three financing methods has distinct benefits and limitations that should be thoroughly evaluated in light of the specific objectives of the issuer. Yankee bonds are typically the most cost‐efficient vehicle for large, investment‐grade issuers. The fastest growing segment is the rule 144A market, which accounted for 38% (by number, not dollar volume) of all U.S. cross‐border debt transactions in 1996. The Rule 144A structure is often used for complex structures requiring heavy rating‐agency involvement, such as future financial flow transactions and project financings. The 144A market has also become a particular favorite with international issuers because of its less formal disclosure requirements and streamlined execution process. The private placement market, which accounted for 24% of cross‐border transactions in 1996, continues to be the dominant choice of smaller issuers, companies with complicated “stories,” and firms that do not wish to submit to regular scrutiny by rating agencies. This article provides a detailed analysis of each type of bond issuance and the related issues facing a financial officer in trying to determine the most appropriate source of long‐term debt.

Disclosure Costs, Regulation, and the Expansion of the Private-Placement Market

The private-placement debt market has grown dramatically in recent years. Private placements have a “competitive advantage” over public placements in being exempt from many regulations, including disclosure procedures and auditing requirements. Here, a model is developed to explain the growth in the private-placement market. Corporate borrowers choose between public and private placement of debt so as to minimize borrowing costs. Borrowers in the public-placement market incur higher regulatory cost, but are also able to signal accurately their true risk of default. In private placements, there is an asymmetric information problem. This results in an equilibrium where the debt market gets partitioned between private and public placements. It is shown that raising regulatory costs will lead to an expansion of the market share of private placements. It will also lead to an increase in the overall default rate on corporate debt.

Disclosure Costs, Regulation, and the Expansion of the Private-Placement Market: Professional Adaptation

Disclosure Costs, Regulation, and the Expansion of the Private-Placement Market: Professional Adaptation

The Double-B Private Placement Market

The Double-B Private Placement Market

Rule 144A: Why Foreign Companies Are “Taking the Plunge” into the US. Private Placement Market

Abstract172e SEC'S new Rule 144A will encourage foreign issuers to sell their securities in the US., and US. institutional investors can expect a greater variety of foreign investment alternatives than ever before. But some US. companies seeking to raise funds through private securities offerings may eventually need to contend with the additional competition for US. investment dollars created by the foreign oferings. It's all part of what is fast becoming an international market for capital.

The Demand for Funds in the Public and Private Corporate Bond Markets

THE purpose of this paper is (1) to determine whether corporations' decisions to borrow in the public or private corporate bond markets are significantly influenced by yield differentials between the two markets and (2) whether the sensitivity of corporations to yield differentials increases with the relative ease with which they can borrow in either market. In recent years, the influence of interest rates on corporation financing decisions has received considerable attention in studies which have sought to identify the determinants of corporate external financing and the maturity composition of corporations' liabilities.' In none of these studies, however, can the signs of the interest rate variables in the regression equations be predicted. This is because the expectations hypothesis of the term structure of interest rates which these studies accept posits that interest costs will be equalized regardless of the maturity financing strategy a borrower adopts. As a result the credibility of the findings of these studies concerning the influence of interest rates on financing decisions must be questioned even when this influence was found to be significant.2 In contrast, yield differentials between the public and private corporate bond markets have a predictable effect on the distribution decisions of borrowers. Since nominal rates typically are higher in the private market, a decrease (increase) in yield differentials should encourage (discourage) the sale of private placements. In the aggregate, then, the percentage of corporate debt sold privately should be negatively related to yield differentials between the two markets. In section II, the variables which influence the supply of and demand for funds in the public and private markets -are identified, and supply and demand equations are formulated. Differences in the distribution process in the two markets as well as marketing constraints, limit the ability of some corporations to borrow in both markets, as described in section III. For the purpose of measuring the influence of yield differentials on distribution decisions, then, corporations are divided into three groups, based on their ability to borrow in both markets. The regression results are discussed in section IV. Only the demand equation is estimated since appropriate data on the supply of funds to the corporate market is not available. The estimation of demand by itself, however, produces biased estimates of the coefficient of yield differentials between the public and private markets. The direction of this bias is considered in section V. The major findings are that yield differentials have exerted a significant influence on the distribution decisions of most of the groups studied. Moreover, the sensitivity of corporations to yield differentials is an increasing function of the relative ease with which they can borrow in both the public and private markets. Finally, if supply and demand had been estimated simultaneously, yield differentials most likely would have exerted a stronger influence on the distribution decisions of borrowers. Received for publication November 29, 1972. Revision accepted for publication May 22, 1973. * This paper is based in part on a study of the private placement market by Shapiro and Wolf (1972). In Shapiro and Wolf (chapter 5), the variables influencing the supply and demand for public and private financing are discussed and the distribution patterns of different borrower categories are compared. This paper extends this analysis by estimating a demand equation for public and private financing and by measuring the sensitivity of different borrower groups to yield differentials between the two markets. T am indebted to Professors John Keith, Richard Rippe and Maurice Wilkinson of the Columbia Business School and to Professors Robert Glauber and John Lintner of the Harvard Business School for their helpful comments. This study was supported by faculty research funds of the Columbia Business School. 1 Cragg and Baxter (1970) attempted to determine the factors which influenced the timing and the size of bond financings of 129 industrial companies using a probit analysis. Bosworth (1971) and White (unpublished) explained the maturity composition of total corporate borrowing using the Federal Reserve's Flow-of-Funds data. 2 Only in White's study was the fraction of long-term-tototal debt issues significantly (and negatively) related to the relative cost of long-term financing.