What is a ‘Bought Deal’?
A bought deal is a securities offering in which an investment bank commits to buy the entire offering from the client company. A bought deal eliminates the issuing company’s financing risk, ensuring it will raises the intended amount. However, the client firm will likely get a lower price by taking this approach instead of pricing it via the public markets with a preliminary prospectus filing.
BREAKING DOWN ‘Bought Deal’
A bought deal is relatively risky for the investment bank. This is because the investment bank must turn around and try to sell the acquired block of securities to other investors for a profit. The investment bank assumes the risk of a potential net loss in this scenario, either that the securities will sell at a lower price after losing value, or that they will not sell at all.
To offset this risk, the investment bank often negotiates a significant discount when buying the offering from the issuing client. If the deal is large, an investment bank may team up with other banks and form a syndicate so that each firm bears only a portion of the risk.