There are three ways for a bank to approach the bidding for the lead arranger mandate, each in accordance with the bank’s interest in being awarded:
- Bid to win – If a deal appears potentially attractive, a bank bids aggressively with the objective to win the lead mandate.
- Bid to lose – If a deal appears less favorable for the bank but it wants to protect its reputation with the client, then it bids albeit less aggressively without fear of losing. If it wins the mandate to lead the financing, it would be on the bank’s terms and meet the bank’s strategy for pricing and syndication.
- No bid – If a bank is not interested in the transaction and is not concerned about any reputational risk and impact of not bidding for the deal, it tenders no bid.
We decided to bid less aggressively without fear of losing. Yet to protect our reputation, we wanted to bid aggressively enough to make the short list for this high-profile deal. If we happened to win the mandate, it would have to be on terms that met our earnings thresholds.
Bidders perform an initial credit analysis and then compete on pricing and syndication strategy. Key elements of pricing include the margin (interest spread) over a base rate such as LIBOR, underpricing, and fees. The strategy determines how the financing should be distributed, the amount that the mandated arranger intends to retain in the primary market, and how the price can be “flexed”.