2023-06-14 11:00:57
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Do you know the expression underwriting? It is used in the financial market to refer to an operation in which companies raise investments with an intermediary. This procedure has very specific rules that can generate doubts.
After all, underwriting is still little known among investors, but it can represent interesting opportunities in the financial market. For this reason, it is interesting to know more regarding this process.
In this article, you will learn what underwriting is and how it works, in addition to other important information on the subject. Let’s go?
What is underwriting?
The word underwriting comes from the English language and means subscription, or signing below. It refers to the process in which a company or even the Federal Government performs public subscription to raise funds through an intermediary company.
Thus, underwriting serves to facilitate the launch of assets on the market. The intermediary institution is called an underwriter or underwriter. She takes on the responsibility of connecting the company to the shareholder — or potential shareholder.
This process is regulated by the Central Bank (BC) and offers guarantees to investors. Because it is a complex operation with high capital, the underwriters can join together in consortiums, acting together.
How does the operation work?
Now that you know what this operation is, it’s important to understand how it works. When a company or the government is interested in underwriting, it is necessary to look for an intermediary to offer the assets on the market.
The institution issuing the assets benefits from the simplification of a complex process, with fewer requirements compared to listing shares on the stock exchange, for example. In addition, it has the possibility of sharing the risks of the operation with the underwriter.
In return, the underwriter has the opportunity to profit from the process. But this company performs important functions and accepts the risks of the operation. Thus, the underwriter must connect the issuer and the investors, publishing the offer and trading the assets.
So underwriting works with a few steps:
the company or the Government hires the underwriter to issue the assets; the rules for the contract and the type of procedure to be carried out are defined; the underwriter performs the risk analysis and price definition; assets are launched on the market.
What is the role of the underwriter?
So far, you already understood that the underwriter plays a key role in this operation, right? But it is worth knowing more regarding the participation of this company in the procedure. To act as an underwriter, the institution must be classified as one of these institutions:
multiple bank; investment bank; brokerage and distribution company.
As the underwriters assume risks in the operation, they carry out a careful evaluation to approve the process. For this, the institutions analyze the broadcaster and the market, with the objective of verifying the viability of the proposal and the type of underwriting to be carried out.
What are the types of underwriting?
As you’ve seen, there are different types of underwriting. They determine the transaction rules and the level of risk to be shared with the intermediary. Meet each one of them!
Underwriting best efforts or best-effort
The best-effort or best-effort type is characterized by less commitment by the subscriber. It uses its best efforts to launch stocks and bonds in the market, but is not responsible for the sale of all assets.
Therefore, the intermediary has the duty to carry out the entire procedure in the best possible way, in accordance with the rules of the inspection agents. However, if not all assets are sold, it is not responsible for underwriting them.
Underwriting residual ou stand by
In residual or stand-by underwriting, there is a greater level of responsibility for the underwriter. In this case, in addition to employing the best efforts for the launch, it can also choose to subscribe for the assets that are not sold.
Thus, following the term defined in the contract, the intermediary chooses whether it intends to subscribe the remaining assets or whether it will return them to the issuer.
Underwriting firme ou straight
Finally, the third type of underwriting is firm or straight. This is the model that has the most commitment for the subscriber. This is because it fully assumes the risks of the offer. Therefore, all assets are your responsibility — regardless of whether they are sold or not.
Therefore, the intermediary is responsible for the transaction risks, exempting the issuer. However, the contract may have a clause called market out. It exempts the subscriber from responsibilities in situations that impair the quality of the papers or securities traded.
What is the difference between IPO and underwriting?
A frequent question regarding underwriting is regarding its relationship with the initial public offering (IPO). The term IPO is used to indicate the launch of a company’s shares or fund shares on the stock exchange. For this, the issuer must comply with the rules of the process.
In the case of underwriting, it is the underwriting company that launches the shares. Therefore, she is the one who needs to conform to the rules in place of the issuer. In this way, the process is an alternative for companies that do not yet meet the minimum requirements for listing on the stock exchange.
Why is it important to know this concept?
After knowing more regarding underwriting, it is worth knowing how important it is for investors. Although this procedure is still little known, it may represent opportunities for some investors.
In this sense, the financial market has many alternatives for investing — and they can suit different profiles and objectives. Therefore, understanding processes such as underwriting is a way to make more informed decisions regarding your investments.
Now that you know what underwriting is, you can assess whether it makes sense for your strategy. When choosing, be sure to also observe the type of subscription carried out, as knowing the subscriber’s responsibilities can help when analyzing the feasibility of the operation.
To understand more regarding financial market opportunities, you can count on investment advice. Get in touch with Renova Invest and find out how!
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