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What are underwriting spreads?

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In an underwritten deal, the lead arranger retains some amount of the underwriting fee as compensation for its services and uses the rest either as sub-underwriter or closing fees.  The underwriting fee is the primary compensation for lead arrangers acting as the sole mandated bank and underwriter.  The breakdown of the arrangement fee is generally not made known to the borrower and is only verbally agreed among the syndicate members and confirmed in a follow-up mail.

The retained underwriting fee is usually quite substantial in relation to the underwriter’s ultimate exposure as a lender in the deal.

The underwriting spread is the difference between the underwriting fee received by lead underwriters for the initial underwriting of total financing amount and the amount shared with the sub-underwriters or paid directly to participant lenders.  The sub-underwriting spread is the difference between the amount of the underwriting fee paid by lead arrangers to sub-underwriters on the basis of the allocated amount of their underwriting and the closing fee paid by the sub-underwriters to participant lenders.

The pool (“skim”) is the difference between the total amount of closing fees available to pay participant lenders (total available fee income) and the actual amount of closing fees paid to the lenders total payable fee income), it commonly being shared by the sub-underwriters pro rata to their underwriting commitment.  Generally, the more participant lenders, the smaller their ticket size.  Since the smaller tickets receive no closing fee, the underwriters keep the resulting skim.

The 20 basis point difference between the top-tier closing fee of 70 basis points and the 50 basis points actually paid to Lead Managers accrues to the pool and is split evenly among the sub-underwriters.

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