Rule adopted because the lack of liquidity a in 1990

This preview shows page 6 - 9 out of 9 pages.

creditworthy companies. Rule adopted because the lack of liquidity a. in 1990, the SEC adopted rule 144ae. Is Rule 144a likely to lead to the development of an active secondary market in “category 1” private placements (private relationship market for bonds of medium sized issuers)? Yes, it did just this. It created a secondary market for medium sized company’s securities, making them attractive to new categories of lenders such as mutual funds and pension funds Rule permitted unrestricted trading of privately placed securities among “qualified institutional buyers”- institutional investors with at least $100 million in assets. i. Why is public issue (being sold to the public at large) not a realistic option for category 1 companies? It is likely that a medium company does not have as many investors as a category 2 company therefore, the individuals who buy the securities of medium sized companies will likely prefer a relationship type of financing that would exclude them from public issuing ALSO, medium sized companies often lack the credit standing for a public issue, or their financing needs are too small to justify the large fixed costs of public issues
Image of page 6

Subscribe to view the full document.

ii. Are their securities easily transferable? What makes a security easily transferable? Rule 144a makes the securities transferable o Expansion of market lowered rates and attracted more creditworthy borrowers in the market Yes, the securities are transferable through syndication o With syndication, the bank can sell parts of the loan to other investors or banks o Liquidity provided by Rule 144a has permitted in the private placement market has put competitive pressure on the syndicated loan market to follow suit Security is easily transferable if you can transfer ownership from one party to another or delegate parts of a security to other parties iii. What is likely to be the attitude of the borrower to transfer of its debt by the initial lender? Won’t be affected because it’s an arm’s length market I would imagine it wouldn’t affect the borrower much if the lenders are similar in economic stability (as far as providing the borrower with more loans and money) If the lender b. Will Rule 144a make the private placement market more attractive for “category 2” issuers? Yes, because of the unrestricted i. What types of company are likely to be “category 2” issuers? Large corporations Pension fund Mutual funds Government ii. Why did these issuers not use the private placement market before? How does Rule 144a change things? Because there was a lack of liquidity in the private market Because they could trade unrestricted in the public market because they had good credit, their securities did not have to be closely monitored all the time because of their reputation They can now do this in the secondary market although, I don’t think they will because the public sector seems to be preferred
Image of page 7
iii. How will the introduction of Rule 144a affect the efficiency of the financial system?
Image of page 8

Subscribe to view the full document.

Image of page 9

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes