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Q: When is a bought deal not a bought deal?

A: When a bought deal is run in the heads I win tails you lose world of the Canadian rip-off brokers and bankers society.

I saw this yesterday and decided to let it pass, but I woke up this morning thinking about it and couldn't get it out my head even after a strong and delicious cup of coffee either, so to get the monkey of mine back here we are. First let's note the definition of a bought deal as shown in Wikipedia which in this case is accurate enough and succinct too, therefore quoteable:
A bought deal occurs when an underwriter, such as an investment bank or a syndicate, purchases securities from an issuer before a preliminary prospectus is filed. The investment bank (or underwriter) acts as principal rather than agent and thus actually "goes long" in the security. The bank negotiates a price with the issuer (usually at a discount to the current market price, if applicable).
The advantage of the bought deal from the issuer's perspective is that they do not have to worry about financing risk (the risk that the financing can only be done at a discount too steep to market price.) This is in contrast to a fully marketed offering, where the underwriters have to "market" the offering to prospective buyers, only after which the price is set.
The advantages of the bought deal from the underwriter's perspective include:
  1. Bought deals are usually priced at a larger discount to market than fully marketed deals, and thus may be easier to sell; and
  2. The issuer/client may only be willing to do a deal if it is bought (as it eliminates execution or market risk.)
The disadvantage of the bought deal from the underwriter's perspective is that if it cannot sell the securities, it must hold them. This is usually the result of the market price falling below the issue price, which means the underwriter loses money. The underwriter also uses up its capital, which would probably otherwise be put to better use (given sell-side investment banks are not usually in the business of buying new issues of securities).

So in essence;

1) The company sells the placement shares to the brokerage
2) The brokerage takes on the risk of selling the shares to its clients or being left holding some or all of them
3) And in return for leaving itself open to that risk, makes a bit more money from the deal (via cheaper shares, or warrants awards, or higher commish, or other)

And thus the scene is set, which allows us to move on to a news release from Sulliden Gold Corp. ( from November 3rd which went like this:

Sulliden Gold Corporation Ltd. ("Sulliden", the "Company") (TSX:SUE)(OTCQX:SDDDF)(BVLAC:SUE) is pleased to announce that it has entered into an agreement with National Bank Financial Inc. and Cormark Securities Inc. as co-lead underwriters on behalf of a syndicate of underwriters to be formed (the "Underwriters"), for the issuance of 43,353,000 common shares (the "Shares") of the Company, on a bought deal basis, at a price of $1.73 per Share for gross proceeds of $75,000,690 (the "Offering").
The Company will also grant to the Underwriters an option, exercisable at any time until 5:00 p.m. on the 30th day following the closing, to purchase up to an additional 6,500,000 Shares.
The net proceeds from the Offering will be used by the Company to expand the exploration program at the Shahuindo project given recent exploration results, to acquire the existing net smelter royalty on the Shahuindo project, to acquire additional mining concessions adjacent to the Shahuindo project, and to fund other advancement activities at the Shahuindo Property and for general corporate purposes.
The Shares will be offered by way of a short form prospectus to be filed in all of the provinces of Canada pursuant to National Instrument 44-101 Short Form Prospectus Distributions.
The Offering is scheduled to close on or about November 29, 2011 and is subject to certain conditions including, but not limited to, the receipt of all necessary approvals including the approval of the Toronto Stock Exchange and the securities regulatory authorities.

All well and good, no? Canada's National Bank Financial division, along with Cormark, have taken on a bought deal for shares to the tune of $75m. This means that according to the terms of a bought deal is guaranteed to get its 75 large ones and the brokerages are taking on the risk. so we now cut to the NR of yesterday November 9th that has been bugging me ever since:

Sulliden Gold Corporation Ltd. ("Sulliden", the "Company") (TSX:SUE)(OTCQX:SDDDF)(BVLAC:SUE) announces that in connection with its previously announced public offering, the Company and the syndicate of underwriters (the "Underwriters"), have agreed to revise the size of the offering. Under the revised terms, the Underwriters have agreed to purchase, on a bought deal basis, 28,910,000 common shares (the "Shares") of the Company, at a price of $1.73 per Share for gross proceeds of $50,014,300. 

Whaaaaaaaaaaaaaat? In effect, the brokerages running this deal decided to make Sulliden agree that it didn't want $75m any longer, almost certainly because somebody suddenly realized post-facto that they wouldn't be able to place all $75m worth and were about to be left holding a rather large bag. So therefore we now see that the monopolistic Canuck money houses can demand higher cuts by running bought deals, but when the market goes against them they just pretend they're normal placements and hand the risk straight back to the mining company.

The time is ripe for alternative sources of financing for mining activities other than the rip-off Canadian houses.