Bought deal

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A bought deal occurs when an underwriter, such as an investment bank or a syndicate, purchases securities from an issuer before selling them to the public. The investment bank (or underwriter) acts as principal rather than agent and thus actually "goes long" in the security. The bank negotiates a price with the issuer (usually at a discount to the current market price, if applicable).

The advantage of the bought deal from the issuer's perspective is that they do not have to worry about financing risk (the risk that the financing can only be done at a discount too steep to market price.) This is in contrast to a fully-marketed offering, where the underwriters have to "market" the offering to prospective buyers, only after which the price is set.

The advantages of the bought deal from the underwriter's perspective include:

1. Bought deals are usually priced at a larger discount to market than fully marketed deals, and thus may be easier to sell; and
2. The issuer/client may only be willing to do a deal if it is bought (as it eliminates execution or market risk.)

The disadvantage of the bought deal from the underwriter's perspective is that if it cannot sell the securities, it must hold them. This is usually the result of the market price falling below the issue price, which means the underwriter loses money. The underwriter also uses up its capital, which would probably otherwise be put to better use (given sell-side investment banks are not usually in the business of buying new issues of securities.)

Note that stating bought deals are usually priced at a larger discount to market, which is logical and correct, contradicts the statement immediately above that the "financing can only be done at a discount too steep to market price." The dealer that buys the securities as principal intends to sell them at a higher price than he paid. If the securities are to be priced at a larger discount to market to make them easier to sell the dealers have paid the issuing company even less.

This is a distinction without a difference. Bought dels are used probably because the issuer has some doubts that the entire issue will be sold by brokers acting as agents and thus the issuer prefers the dealers to act as principals to ensure that all the capital needed is raised promptly.