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Chapter 3: Financings > Financing Considerations - Pg. 45

Chapter 3 Financings 45 The capital markets groups at investment banks are principally responsible for originating and executing capital markets transactions. In this role, they coordinate with client coverage bankers to target likely issuers and, with professionals from the syndicate desk, determine appro- priate potential pricing. In conjunction with the client coverage banker, the capital markets group enters into an intensely competitive process to receive a mandate from an issuer for a financing. Competitive pressures sometimes compel investment banks to undertake considerable risks, such as agreeing to a bought deal: buying an entire transaction at a specified price from the issuer and attempting to resell the security at a higher price to investors. Another risk that investment banks sometimes assume involves providing a large loan to a client as a bridge financing (to support an M&A transaction) prior to a subsequent take-out financing underwritten by the bank in the capital markets. If markets do not permit a take-out financing on reasonable terms, the bank is required to fund the loan for the client. Financing Considerations When investment bankers advise issuers regarding potential financing transactions, the bankers typically focus on liquidity (cash balances, marketable securities, and available lines of credit), cash flow multiples, debt/earnings multiples, cost of capital, and rating agency considerations before recommending whether a client should raise financing, and, if so, whether it should be in the form of debt, equity, or a hybrid security like a convertible. Bankers also analyze the com- pany's liquidity as a percentage of market capitalization, total debt, annual interest payment obli- gations, and other balance sheet and income statement metrics. These metrics are then compared