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12.3 Dealer’s Advisory Relationship With Corporations

Explore the intricate advisory relationship between dealers and corporations in the context of financing and issuing securities. Learn about the roles, advisory services, key considerations, and protective provisions involved in these financial transactions.

Overview the Dealer’s Advisory Relationship with Corporations

When a corporation decides to undertake financing, it secures the services of a dealer. Selecting a lead dealer involves various considerations about the dealer’s reputation for providing advisory services on timing, amount, and pricing of an issue. As well, the lead dealer provides advice on issue distribution, after-issue market support, and after-issue market informational support. Obtaining a reputable dealer also tends to result in better market acceptance of the issue and cheaper financing for the issuing corporation.

Initial Negotiations and Due Diligence

When negotiations for a new issue of securities begin between the dealer and corporate issuer, the dealer normally prepares a thorough assessment of the corporation and its industry. The study includes the corporation’s position within the industry, financial record, financial structure, and future prospects. All risk factors associated with the industry and the company are closely observed. This assessment is known as a due diligence report.

Various experts in appropriate fields such as engineers, geologists, management professionals, or chartered accountants may be consulted. Following this comprehensive study, the dealer determines whether the corporation is a suitable candidate for a new issue and decides if they will proceed as the lead dealer.

Role as Principal or Agent

The dealer may choose to act either as a principal or an agent for the corporate financing. Regardless, the issuing corporation relies on the dealer’s advice and guidance to design the various features of the securities. This advisory relationship parallels the professional relationship between a lawyer and a client.

Once solidified, the dealer may become the broker of record with the right of first refusal on new financings planned by the corporation.


The lead dealer’s corporate finance team plays a vital role in designing the new issue and advising the corporation on the best market strategy. The corporation aims to ensure that new securities align with its capitalization strategy and that restrictive provisions do not hamper future decision-making.

Market Assessment and Recommendations

The dealer’s recommendations are based on a variety of factors including current market conditions, investor preferences, the impact of financing options on the corporation’s existing capitalization, and future earnings stability. Table 12.3 provides a summary of considerations for issuing different types of securities:

Table 12.3 | Issuing Securities

Type of Security Advantages Disadvantages
Bonds Lower interest rate Less flexible due to asset pledges
Suitable for institutions requiring secured debt Problematic in mergers due to asset pledges
Debentures No specific pledges or liens Higher coupon rate than bonds
Lower cost at issue Regular interest payments required
Preferred Shares Considered equity, increasing debt capacity High issuance cost due to after-tax dividend payments
Non-payment of dividends does not trigger default Dividend omission can lead to voting rights for preferred shareholders
Common Shares No obligation to pay dividends Dilution of existing shareholders’ equity
No repayment of capital required Dividends paid from after-tax dollars are expensive

Advice on Protective Provisions

The dealer provides advisory services on the security’s specific attributes, for example, interest rates, redemption processes, and various protective provisions.

These provisions, known as protective provisions, trust deed restrictions, or covenants, are safeguards for security holders in case the issuers’ financial conditions change. For different securities, these clauses have different terminologies:

  • For mortgage bonds, they are termed deed of trust and mortgage.
  • For corporate debentures, they are known as trust indenture.

Consultation with Experts

To ensure the accuracy of the due diligence report and the final advisory recommendation, dealers sometimes consult with experts from sectors related to the corporation’s business. This helps in understanding the operational and financial intricacies of the corporation.

Key Takeaways

  • Dealer’s advisory roles include selecting the time, amount, and pricing of an issue, as well as post-issue support.
  • Independent assessments involving a due diligence report are critical in determining a corporation’s suitability for a new issue.
  • Depending on the relationship and confidence developed, the dealer may either act as a principal or as an agent in the issuance process.
  • Different types of securities, such as bonds, debentures, preferred shares, and common shares, come with distinct advantages and disadvantages which must be carefully evaluated.
  • Protective provisions and covenants secure the interests of security holders and must be customized based on the issuing corporation’s financial health.


  • Broker of Record: The designated broker who has a primary advisory and transactional role for a corporation’s financing activities.
  • Due Diligence Report: A comprehensive appraisal of a business undertaken by a prospective buyer or investor, considering an array of financial, operational, and market factors.
  • Protective Provisions: Safeguards included in security agreements to protect the interests of investors.
  • Trust Deed: A formal document outlining the responsibilities of trustees and rights of bondholders or debenture holders.
  • Trust Indenture: An agreement in debt securities that include restrictive covenants to protect bondholders.

Frequently Asked Questions

What factors do dealers consider in the due diligence process? Dealers analyze the corporation’s industry standing, financial health, growth prospects, and associated risks. They may also consult experts as part of this comprehensive assessment.

What is the difference between acting as a principal and acting as an agent in financing? Acting as a principal means using their own resources to finance the corporation, while acting as an agent involves arranging financing between the corporation and third-party investors.

How do protective provisions benefit investors? Protective provisions offer safeguards against financial deterioration of the issuer and protect the investors’ interests by imposing operational and financial restrictions on the issuer.

Why might a corporation choose to issue debentures instead of bonds? Corporations may prefer to issue debentures over bonds because they provide more flexibility since they are not secured by specific assets and have lower initial costs at issuance.

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## What is the primary role of the lead dealer in a corporation's financing process? - [ ] To oversee company management activities - [ ] To handle legal issues pertaining to the corporation - [x] To provide advisory services on timing, amount, and pricing of an issue - [ ] To manage company employees > **Explanation:** The lead dealer's primary role includes providing advice on timing, amount, and pricing of the issue, as well as issue distribution and after-issue market support. ## What is the thorough assessment prepared by the dealer called? - [ ] Market analysis - [ ] Risk assessment - [x] Due diligence report - [ ] Financial audit > **Explanation:** The assessment of the corporation and its industry by the dealer is referred to as a due diligence report. ## Who can be consulted during the dealer’s assessment of the corporation? - [x] Engineers, geologists, management professionals, or chartered accountants - [ ] Marketing professionals - [ ] Sales representatives - [ ] Human resource managers > **Explanation:** Experts such as engineers, geologists, management professionals, or chartered accountants may be consulted to gather comprehensive information. ## What relationship may develop between the corporation and the lead dealer? - [ ] Client-consultant - [ ] Buyer-seller - [x] Professional relationship, similar to lawyer and client - [ ] Supplier-contractor > **Explanation:** The advisory relationship can become very close, often similar to the professional relationship between a lawyer and client. ## What right might the lead dealer obtain once the relationship with the corporation is solidified? - [ ] Exclusive advertising rights - [ ] Decision-making rights within the corporation - [ ] Hiring privileges - [x] Right of first refusal on new financings > **Explanation:** The lead dealer may secure the right of first refusal on future financings planned by the corporation. ## What does the corporation ensure regarding new securities and firm’s capitalization? - [ ] That they are flexible to market changes - [ ] That they include legal compliance clauses - [ ] That they are environmentally friendly - [x] That new securities are consistent with the firm's capitalization > **Explanation:** The corporation ensures that new securities align with the firm's capitalization and do not limit future decision-making flexibility. ## What is a disadvantage of issuing bonds over other forms of securities? - [ ] They have lower flexibility due to asset pledges - [ ] Bonds have variable interest rates - [x] They require regular interest payments, failure of which can lead to default - [ ] They incur higher registration costs > **Explanation:** A major disadvantage of bonds is the obligation for regular interest payments which, if missed, can lead to default. ## Which security type is considered more flexible due to the absence of specific pledges or liens? - [ ] Bonds - [ ] Preferred shares - [ ] Common shares - [x] Debentures > **Explanation:** Debentures are considered flexible because they do not have specific pledges or liens on assets. ## What happens if a company omits payment of dividends on preferred shares? - [ ] It triggers immediate financial penalties - [ ] It leads to cancellation of the shares - [x] It can occasionally trigger the implementation of voting privileges for preferred shareholders - [ ] It results in default similar to bonds > **Explanation:** Non-payment of dividends on preferred shares can occasionally trigger voting privileges for preferred shareholders, adding flexibility without immediate severe repercussions. ## What are protective provisions in the context of issuing securities? - [ ] Clauses that specify the issuing date and timeline - [ ] Regulations about the appointment of company executives - [x] Clauses included in the trust deed or trust indenture to safeguard the security holder's position - [ ] Guidelines for employee benefits and career growth > **Explanation:** Protective provisions are clauses placed in the trust deed or trust indenture to protect the security holder if the issuer's financial position weakens.

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In this section

  • 12.3.1 Method Of Offering
    Explore the different methods of offering securities in corporate financing, including private placement, public offerings, and the distinctions between primary and secondary offerings.