All-or-none Underwriting

Companies sell new stocks or bonds through all-or-none underwriting. They hire a group of investment banks called a syndicate to help them. The banks in the syndicate work together to sell all of the new securities to investors.

How it Works

Here’s how all-or-none underwriting usually goes:

1. A company decides to raise money by selling stocks or bonds, which makes it an “issuer.”
2. The issuer hires some investment banks to sell the new securities. These banks form the “syndicate.”
3. The syndicate and issuer agree on a price for the new securities and that the syndicate must sell all the securities, or the whole deal will fail.
4. The banks in the syndicate work hard to find investors to buy the securities at the agreed price.
5. If the syndicate sells all the securities, great! The issuer gets the money it wants to raise. The banks in the syndicate get paid a fee for their work.
6. But if the syndicate can’t find enough buyers, the issuer can cancel the deal. The issuer doesn’t have to sell any securities if the syndicate doesn’t sell all of them.

So, in all-or-none underwriting, it’s all or nothing. Either the whole offering sells, or none of it does. The issuer doesn’t have to go through with the deal unless the syndicate delivers on selling 100% of the new stocks or bonds.

Why Companies Like It

Companies often like all-or-none underwriting because it reduces their risk. They know they’ll get all the money they planned on raising, or they can just cancel the deal. There’s no chance of only selling some securities and being stuck with less money than they wanted.

It also makes the pricing simple and transparent. The issuer and syndicate agree to a fixed price upfront. The issuer doesn’t have to worry about the price moving around while the syndicate shops the securities.

Why It Can Be Tricky

All-or-none underwriting is excellent for issuers, but it can be challenging for the investment banks in the syndicate. If investors aren’t excited about the new securities, the banks might have trouble selling all of them at the agreed price.

Remember, the issuer can leave the deal if the syndicate falls short. Then, the banks aren’t paid for all their work trying to sell the securities. They took on the risk of guaranteeing a price and promising to sell everything.

When It Gets Used

Not surprisingly, all-or-none underwriting tends to happen when an issuer is confident that their securities will be a hit with investors or when the issuer has a lot of bargaining power to pressure the banks into taking on the risk.

It’s widespread with high-demand offerings like:

• Initial public offerings (IPOs) of hot tech companies
• Popular startups raising another round of funding
• Well-known, blue-chip corporations issuing more stock or bonds
• Government bond offerings that institutional investors love

Alternatives to All-or-none

All-or-none is just one of several ways to structure an underwriting deal. Some other typical methods:

Best Efforts Underwriting

In “best efforts” underwriting, the syndicate sells as much of the offering as possible, but it doesn’t guarantee to sell all of it. If some securities are left over, the issuer still has to issue them.

The banks just promise to put their “best efforts” into drumming up buyers. But the banks aren’t on the hook if buyers don’t materialize. The issuer has to live with raising less money than they hoped for.

Bought Deal

In a “bought deal,” the syndicate buys all the securities from the issuer. Then, the banks resell the securities to the public at a higher price.

The syndicate’s profit is the “spread” between the price they bought the securities and the higher price they sell them for later. But if they misjudged demand, they could get stuck holding securities they overpaid for!

A bought deal eliminates the issuer’s risk because the banks have already collected their money. However, banks gamble because the securities are worth their price. This is the opposite of all-or-none, where the issuer takes more risk.

Final Overview

All-or-none underwriting allows companies to raise capital while cutting their risk. However, the investment banks that do the underwriting take on more risk in exchange.

It’s not the only way to handle a new securities offering. The best efforts in underwriting and buying deals spread the risk out differently. Which method makes sense depends on the issuer, the banks, and how hot the market is for the securities. But all-or-none remains a popular choice, especially for the most in-demand offerings.