Can someone explain what a Balance Sheet Bank is?
First year college student interested in capital markets here.
I've heard a lot of talk about "big balance sheet" banks like Citi and BNP being able to get on deals because of their balance sheets. I'm wondering what this exactly means: how does a large balance sheet translate to being able to finance deals?
I've heard that it gives them access to cheap financing, but I'm unsure what this means in the context of a capital raise/M&A deal. Are banks like Citi/BNP merely just the ones giving capital, or do they play a larger role in the deal?
Thanks
Having a lot of capital on a bank's balance sheet does help a bank on more deals, assuming they are firm commitment deals. The most common type of underwriting commitments are Firm Commitments or Best Efforts. In a Firm Commitment the managing underwriter agrees to purchase all shares that are to be offered, so they need more capital on their balance sheet to support the transaction. If part of the new issue goes unsold, any unsold shares are distributed among the underwriters. In a Best Efforts offering, the underwriters don't use any of the capital off their balance sheet and aren't responsible for any of the offering that isn't sold. In this case, the underwriter will attempt to sell all the securities but have no obligations to buy any unsold shares.
Thanks for the insight.
So having a large balance sheet is primarily used to get underwriting roles in deals because these banks have the capacity to underwrite more. If that's the case, why would any client want to do a best offering commitment? Doesn't it just make sense to reduce the risk by going the full commitment route? Maybe because underwriting fees are higher in that case?
im also aware that boutiques tend not to have a balance sheet. does this mean places like PJT, Centerview Partners never get involved in the financing process of their clients and they just do pure strategic advisory?
Yes. If a bank doesn't have a balance sheet they don't have ability to underwrite/ finance themselves. They can however outsource. The function those places fill is generally advisory services i.e. they help negotiate and provide valuation and process expertise. Generally their work also leans more toward M&A rather than public market functions like IPO's, debt raises, etc.
Clients prefer Firm Commitments but banks prefer Best Efforts. Best Efforts are typically used in higher risk offerings. Higher risk offerings have higher underwriting fees. Firm commitments don't always cost more because they are often used for less risky offerings.
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