3.4.4. Distribution of Underwritng Spread
When syndicate members receive an order for a sale, they will report it to the lead underwriter, who records and confirms the order. Syndicate members must report the type of order and, for group orders, the identity of the investor.
If the issue is not entirely sold after the order period, the lead underwriter will assign responsibility for the unsold bonds among the members as allocated in the syndicate letter or AAU. If the issue is oversubscribed, the lead underwriter will decide which bonds receive priority. On the settlement date (closing date), the lead underwriter will distribute the profits to the syndicate members.
For both competitive bids and negotiated sales, underwriters are compensated by the difference between the price they pay the issuer for the bonds and the price at which they resell them to the public. This difference is called the spread, which is made up of several components. The managing underwriter gets a percentage of the entire issue, each of the syndicate members gets a percentage of the sales they make, and if a selling group is participating, they get a cut as well.
We will describe the components of the spread in terms of bond points. Recall that each bond point is equal to 1% of a bond’s par value, and each 1/8 of a bond point is equal to 0.125% of par value. Let’s assume the bonds for a new issue will have a face value of $1,000, and the underwriters’ spread is 1 point. That means that for every $1,000 bond sold, the underwriters as a group will receive $10 (1% of $1,000).
The manager’s fee is the payment to the lead underwriter for services rendered. This fee, which might be in the neighborhood of 1/8 of a bond point, comes off the top before any other profits are allocated among the membership. The remainder of the spread is called the total takedown fee. In our example, the syndicate member would receive 7/8 of a bond point, or $8.75. (This is because 7/8 = 0