What Is a Re-Offer Price?
A re-offer price is the price at which the underwriting syndicate of a debt issue resells the bonds or IPO securities to public investors. The syndicate will purchase the bonds for a specified amount from the issuing firm and re-offer the bonds or securities to the public, usually at a different price.
Re-Offer Price Explained
An underwriting investment bank may facilitate a debt issue by agreeing to purchase all of the bonds or securities for a price below face value. Having the underwriters purchase the bond issue, instead of passing the sale onto the public, removes the company's risk of not selling the entire issue. The investment banker will re-offer the bonds to public investors at a higher price, which may be above (premium) slightly below (discount) par value. In a serial issue, most common to municipal general obligation bonds, the first bonds to mature are frequently at a premium with a higher coupon rate. The last bonds to mature in the offering are sometimes sold at a discount, but carry a lower coupon rate.
How Re-Offer Prices Work
Before it sells bonds or securities to the public, a company first needs an investment banker to underwrite the issue. The job of the underwriter is to raise capital for the issuing company. The underwriter accomplishes this by purchasing the securities from the issuing corporation at a predetermined price and reselling them to the public for a profit. The re-offer price is that resale price.
In most cases, a single investment banking firm takes the lead role in setting up an IPO or bond issue. This lead firm is known as the managing underwriter, and it often forms an underwriting syndicate to participate in the sale. This syndicate, in turn, may gather an even larger group of broker-dealers to help with the distribution of the new issue. Their profits come from the advisory fee, which is a percentage of the offering size, and the difference between the purchase price and the re-offer price.
Fixed Price Re-Offers
Fixed price re-offer is a practice of underwriting syndicates strongly enforced in the U.S., where underwriting investment banks agree to sell bonds to investors for no less than an agreed price. This pricing scheme is usually used to sell to institutional investors. The fixed price is usually available for 24 hours after the offering starts. This practice ensures transparency in the primary market. Investors know they cannot get the bonds cheaper from another dealer while the issue is in syndication. For the issuer, the fixed price re-offer method has the advantage of lower underwriting fees.