There are three types of deals a dealer may offer to an issuer during the issuance process: Agency, underwritten, or bought
In the primary debt market, dealers provide expertise and distribution capabilities to issuers interested in raising funds. They are the financial intermediary that connects the issuer with investors. In other words, they help issuers sell the new issue to investors. With that being said, the issuer and dealers mutually agree on the level of commitment for the dealers in the new debt offering. Dealers take on different levels of risk for the offering depending on the nature of this agreement.
In an underwritten deal, one or more dealers agree to purchase the new issue as principal and resell the new issue to the public. In an underwritten deal, the issuer is guaranteed the funds even if the dealer syndicate cannot resell the entire new issue. In this type of deal, dealers have made a firm commitment to the issuer, bearing all the expenses associated with the sale and taking on significant risk to hold the new issue in their inventory. In an underwritten deal, issuers and dealers enter into an Underwriting Agreement that outlines the specific terms of the engagement such as duties of each party.
Underwritten deals can be further separated into:
In an agency deal, new issues are sold on a “best effort” basis by the dealers. The issuer decides on the amount of financing needed and the dealer syndicate solicits investor interest. However, the dealers assume no obligation to purchase any unsold portions of the issue if the demand is lower than anticipated. In an agency deal, issuers and dealers enter into an Agency Agreement that outlines the specific terms of the engagement such as duties of each parity.
Funds collected from the sale of an agency new issue are deposited in a separate escrow account for the benefit of the investors. If the issue is terminated, funds are returned to the investors and no more orders are taken. If the issue is successful, the majority of funds are transferred to the issuer, with the dealers receiving a small portion as fees.