creditworthy companies. Rule adopted because the lack of liquidity a. in 1990, the SEC adopted rule 144ae. Is Rule 144a likely to lead to thedevelopment of an active secondary market in “category 1” privateplacements (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 fundsRule 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 forcategory 1 companies?It is likely that a medium company does not have as many investors asa category 2 company therefore, the individuals who buy the securitiesof medium sized companies will likely prefer a relationship type of financing that would exclude them from public issuingALSO, 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
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ii. Are their securities easily transferable? What makes a security easilytransferable?Rule 144a makes the securities transferableoExpansion of market lowered rates and attracted more creditworthy borrowers in the marketYes, the securities are transferable through syndicationoWith syndication, the bank can sell parts of the loan to other investors or banksoLiquidity 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 partiesiii. What is likely to be the attitude of the borrower to transfer of its debt bythe initial lender?Won’t be affected because it’s an arm’s length marketI 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 corporationsPension fundMutual fundsGovernment ii. Why did these issuers not use the private placement market before? Howdoes Rule 144a change things?Because there was a lack of liquidity in the private marketBecause 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 reputationThey can now do this in the secondary market although, I don’t think they will because the public sector seems to be preferred
iii. How will the introduction of Rule 144a affect the efficiency of the financialsystem?
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