What is an Underwriting Spread?
Underwriting spreads are the difference between the price per share that is paid to an issuing corporation by an underwriter or underwriting group, and the public offering price that the underwriter offers to the public. The underwriting spread generally represents the net proceeds that the underwriter will realize from the investment. Depending on the size of the securities issue and the price that the shares can command on the open market, the underwriting spread can be significant.
There are several factors that can go into determining the size of the underwriting spread. Issues that are released by a corporation that is well known, large in size, and is considered to be financially stable will command a higher price per share at the time of the public offering. In addition to the nature of the issuing corporation, the type of security will also impact the underwriting spread. For example, stocks may bring a better return than a bond issue in some cases. The classification of the security as junior or senior will also impact the desirability of the issue to investors as well.
Along with the factors associated with the issuing entity, the commitment level of the underwriter will also impact the underwriting spread. When a syndicate such as an underwriting group is utilized for the issue, this means that several investment bankers are likely to be involved. The combined networking and resources that this collection of bankers can command versus those of a single underwriter can make a huge difference in the distribution and public awareness of the new security. Also, a syndicate would most likely be able to purchase and resell far more shares than a single underwriter.
The actual range for the underwriting spread is defined in the terms of agreement between the issuing corporation and the underwriter or underwriting group. In cases where the issue is under the auspices of a small company, the underwriting spread may be as low as a fraction of one percent for a bond issue. The spread on stock issues may be anywhere from ten to twenty-five percent. In the event that an underwriting group handles the resale of the securities, the underwriting spread is divided among the participants based on their level of participation in the initial purchase from the issuing corporation.
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