Mock Exam II midterm

Principles of International Finance

Professor Gimede Gigante, PhD
30151

Name___________________________

Surname_________________________

ID_______________________________

Exam rules
1. Every answer is equally weighted.
2. Please be precise in presenting calculations made.
3. Write clearly.
4. You are not allowed to use books, notes and handouts. You are only allowed to use a non-
programmable calculator.
5. Cheating is absolutely forbidden. Exam of people caught in the act of cheating, whispering
and/or looking to someone elses exam will be immediately withdrawn and the name of the
student will be signalled to the discipline committee of the University.

Questions

1. Focus on the Pricing/Allocation phase of an IPO.

a. What key issues are faced by underwriters?
b. Why does a Company decide to go Public?

2. Which of the following statements is not correct with regard to initial public offerings (IPOs)?
a. In a best-efforts offering, the underwriter has no obligation to purchase unsold shares.
b. In an underwritten offering, the underwriter has an obligation to purchase all unsold
shares.
c. Best-efforts offerings provide the firm with the greater assurance that all offered shares
will be sold.
d. More risky stock offerings are done on a best-efforts basis.

3. Which of the following statements are correct about Loan Syndication? (Select all that apply.)
a. A higher final take corresponds to higher fees for lending banks.
b. A lower final take signals confidence by the MLA on the quality of the project.
 c. A higher final take corresponds to higher return on invested capital for lending banks.
d. A higher final take corresponds to lower return on invested capital for the MLA.

4. Which of the following could be considered a main rationale for using a syndication strategy?
(Select all that apply.)
a. To comply more easily with the Basel III capital and liquidity requirements
b. To originate the deal
c. To create a network of banks
d. To speed up the process
e. To share credit risk
f. To keep information confident
g. To negotiate higher fees
h. To leverage the returns

5. Focus on the following case of a dual stage syndication strategy. A loan of 600 mil. is granted
under the following conditions:
Total fees: 1.2%
Co-arranging fees: 0.8%
Upfront management fees: 0.3%
The Co-Lead Arranger (Y) underwrites a total amount of 300 mil. and finances 100 mil. Two
additional Manager banks (X and Z) provide respectively 250 mil. and 150 mil. Who is getting the
largest return on invested capital?
a. Manager Bank (Z)
b. Co-Lead Arranger (Y)
c. Manager Bank (X)
d. Mandated Lead Arranger (W)

6. Price-setting mechanisms in an IPO, describe Open price (Book-building)

7. Which are the principal actors involved in an IPO?

8. Syndicated Loans: How many banks to invite?

 9. Bonds: What are the main differences between Public and Private Placement

Question 10

Focus on the execution process of a right issue. An Italian leading insurer wants to raise 450 mil. of new
capital in a right issue. The company has 120 mil. of shares outstanding that are currently trading at 6.5:

1. Calculate TERP (Theoretical Ex-Rights Price) if the subscription price is set equal to 5
2. Compute the value of the right
3. Compare the wealth of a shareholder that owns 100 shares, in the case he exercises the rights and
in the alternative case in which he sells the rights. Which option brings him the highest increase in
total net worth?
SOLUTIONS

1.a As discussed in class, choosing the right price involves a trade-off between leaving too much of the
issuers money on the table and covering the total order book. Another issue to take into account is that
quality of demand matters - investors placing their orders on the higher end of the price range are usually
those that have performed an extensive due diligence on the company, such as buy & hold investors (vs.
other funds with more aggressive short-term arbitrage strategies) that guarantee a stable after-market
during the launch; bankers have to consider whether the price they are setting is too low or they may find
themselves to face a high-volatile after-launch phase (and potential complaints of the issuer).

1.b You have to refer to the reasons that we have listed in class related to Financial, Strategic and
Governance issues.

2. C

3. B and D

4. A, C, E and H

5. D

6. The issue is presented to institutional investors during a roadshow, that takes on average a couple of
week. A price range is suggested to investors. Based on the roadshow presentation, investors are asked to
provide non-binding indications of interest (bids). The book is built from the bids, and, based on the
information provided by the book, the terms of the offerings are finalized shortly before allocation of
shares. One of the key feature of the open price approach is that allocation of shares among institutional
investors is decided by the investment bank on a discretionary basis. In their pitch book (i.e., the
presentation investment banks prepare to get the mandate) investment banks claim this discretion help to
allocate shares only to selected buy and hold investors, that is investors who do not flip the shares the
very next day. At the closing of the book-building period, the banks of the syndicate underwrite the shares.
Therefore, they are at risk for a short period (usually 24 hours), between the closing and the allocation of
shares. The bids are non-binding; however, because of the repeated nature of the relationship between
investors and the investment bank, it is very rare for any investor to renege on a bid. Moreover, the book is
closed only when there is sufficient demand at the offer price.

7. More than one bank is involved in an IPO. Issuers select a bookrunner (or lead manager) of their equity
offering and the bookrunner (in consultation with the issuer) forms a syndicate of banks to assist in the
pricing, underwriting, and distribution of the offering. The syndicate is bound by a set of formal contracts
(inter-syndicate agreement): upon the completion of the offering, the syndicate is dissolved. While the
functions of the syndicate members are the same in every country, the title given to each role might
change. However, rather than the title, what really matter is the banks relative position within the
syndicate.
In a multi-tranche offering, each tranche has usually a syndicate. An overall manager is appointed,
called global coordinator. The global coordinator is normally part of the syndicate in every tranche
(not necessarily as bookrunner).

The typical syndicate, is composed of three part: i) the managing group, ii) the underwriting group,
and iii) the selling group.

The managing group is composed by the bookrunner and other joint bookrunner(s) (if any). The
bookrunner is responsible for due diligence, roadshow, bookbuilding, allocation, and, not surprisingly, gets
the largest portion of fees. It is not uncommon to see multiple bookrunner, especially for largest IPOs. The
joint bookrunner(s) might be selected by the bookrunner.

The underwriting group is composed by the managing group and non-managing underwriters, the latter
usually called managers. Managers underwrite part of the shares, the proportion of which is determined by
the managing group.

Finally, selling banks just put their best effort in selling the shares, but they do not
underwrite shares; in other words, they do not guarantee the allocation.

The syndicate concentration differs depending on the tranche: the retail tranche is usually more
crowded and includes a selling group (up to 20 banks), while the institutional tranche has usually
4/6 banks and seldom has a selling group.

8. Numbers matter. A syndicate composed of a limited number of financing institutions ensures a higher
degree of confidentiality on the issuers information and on the deal itself and implies a significant
reduction both in coordination costs and in the timing of the decision-making process. On the other hand,
banks bear a greater risk because not all invited parties will actually translate their interest into a capital
commitment and hence in an investment, and this may constitute a problem especially amidst market
turmoil or in the case less-standardized products are offered. Wider syndicates can indeed reduce risks for
the banks involved. However, wider syndicates bear higher coordination costs and more potential
confidentiality issues, as information is shared with more participants.

9. See Maria Teresa Iardellas (Mediobanca) materials.

Question 10

1.
n: Number of old shares= 120mil
N=number of new shares= 450.000.000$/5$=90mil
P: current market price=6,5$
S=subscrption price= 5$

TERP= (120x6,5$+90x5$)/120+90= 5,857142857

2.
Value of 1 right= P-Terp=6,5$-5,85$= 0,64$
 3.

WEALTH Initial
# shs Proceeds/(Costs Tot
DATA CALC NW bought ) Value NW

Exercising 1.025,0
# old shs 120.000.000 TERP 5,86 R 650,00 75,00 ( 375,00) 0 650,00

Price 0,64
(mkt) 6,50 P (Right) 3 Selling R 650,00 0,00 64,29 585,71 650,00
# new shs 90.000.000
Price (tgt) 5,00
Ratio
old/new 0,750
Owned
To change shs/Rights 100