- Underwrite
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"Underwrite" has somewhat different meanings depending on context. In conjunction with financing of companies, the term means that some financially strong party guarantees a transaction.
Assume that a company is in need of at least €100M (one hundred million Euros) as a capital contribution. The company chooses to make a new issuance of shares. Since shares for at least €100M must be subscribed for, there is a risk of a Catch 22 situation -- all of the investors waiting to see if the entire necessary amount will be subscribed for before subscribing themselves.
In the example above, an investor is ready to invest but only upon condition that the issuance is fully subscribed and that at least €100M will come into the company. In order to create security for all of the investors, an investment bank or a relatively large owner may guarantee (underwrite) all or part of the necessary capital amount.
The party which provides the guaranty goes in and, in exchange for a fee, subscribes for any difference that may come into existence between the capital which is subscribed for in the new issuance and the total capital which the company needs. Suppose that in the example above shares for €85M are subscribed for. The guarantor then goes in and subscribes for shares corresponding to the remaining €15M.
- See also
- Next
- New issuance
