In the case of an agency agreement, new expenses are sold by the «best effort» merchants. The issuer decides how much financing is needed and the merchant consortium asks investors for interest. However, distributors do not undertake to purchase parts of the program that are not sold if demand is lower than expected. In an agency contract, issuers and traders enter into an agency agreement specifying the specific terms of the commitment as well as the obligations of each parity. In such a scenario, the insurer risks losing money by not being able to resell the securities at a higher price. In a purchased deal, the underwriter acts as a sponsor and not as an agent. You will find an illustration of a deal purchased below: In the primary debt market, distributors provide skills and distribution capabilities to issuers interested in fundraising. They are the financial intermediary that connects the issuer to investors. In other words, they help issuers sell the new issue to investors.
In this regard, the issuer and traders agree on the amount of commitment to traders in the new debt offer. Distributors take different risks for the offer depending on the nature of this agreement. From the insurer`s point of view, one of the advantages of the purchased agreement is that a purchase transaction is relatively risky for the investment bank. Indeed, the investment bank must turn around and try to sell the block of acquired securities profitably to other investors. In this scenario, the investment bank runs the risk of a possible net loss, either that the securities sell at a lower price after a loss of value or do not sell it at all. To compensate for this risk, the investment bank often negotiates a significant discount when purchasing the offer from the issuing customer. If the agreement is important, an investment bank can merge with other banks and form a union, so that each company bears only part of the risk. The downside of the agreement purchased from the insurer`s point of view is that if it cannot sell the securities, it must hold them. This is usually the result of the market price, which falls below the issue price, which means that the underwriter loses money.