What does it mean when we say a bank is the ‘bookrunner’ for a deal? Or if a financial institution has acted as the ‘lead manager’ or ‘lead arranger’? These are just some or the roles that banks can play in bond issuances and loan transactions.
One of the main ways of distinguishing among these roles is the level of involvement and volume of work they entail. In other words, the role the financial entity is playing is determined by the tasks it performs and its leadership of the transaction, with the roles with the most involvement receiving the highest fees. The recognition the deal attracts in the market also adds additional value.
However, the meaning of these terms differs depending on the type of financial instrument involved; if we are talking about a bond or a syndicated loan for example. The most important roles for each financial format are described below.
There are four key roles in bond issuances:
- Active bookrunner: a group of banks designated by the issuer to place the issuance. They are responsible for keeping the investor order book and determining the final assignment to each investor, and for keeping the documentation for the issue, which they usually entrust to an external legal advisor. They also organize calls with investors and accompany the issuer on the roadshow.
- Passive bookrunner: while not actively involved in placing the bond, and therefore not having access to managing the books, they are included in a higher level and usually receive the same fees and league table credit.
- Co-manager: this is a role that issuers give to entities with which they have some form of cross sell commitment. They do not perform a function as such, and their role is therefore junior. Consequently, they receive much lower fees.
- Left-lead or Physical bookrunner: this involves the same functions as the active bookrunner, only for high yield issuances (bonds issued by companies that are not investment grade).
The key roles in the market for syndicated loans are:
- Bookrunner: This role is optional. If it exists, it refers to the entity or entities - there could be several - designated by the company to coordinate the syndication process. The bookrunner is also responsible for structuring the financing, and for designing and implementing the transaction.
- Mandated Lead Arranger (MLA): when there is a bookrunner in the transaction, the MLA is the second most important role, due to the amount they contribute to the financing operation. In the absence of a bookrunner, the MLA is the most important role, and is awarded to the banks that lead the structuring of the transaction.
- Lead Manager/ Lead Arranger, Arranger and Participant: the bank or banks that provide financing for the operation. They play one of these roles (in descending order of importance) depending on their financial contribution.