Western Account

The term Western Account is often used within the context of finance and trading, specifically referring to a type of syndicate account used in securities underwriting. A Western Account, also known as a Divided Account, contrasts with an Eastern Account (or Undivided Account) in terms of how responsibilities and liabilities are allocated among the syndicate members.

Overview

A syndicate is a group of investment banks or underwriters that come together temporarily to handle the issuance and distribution of a new security offering. The primary purpose of forming a syndicate is to pool the financial resources and spread the risk among several institutions.

In a Western Account, each syndicate member is responsible only for the amount of the issue they have committed to underwrite. If a portion of the issue remains unsold, only the underwriters who committed to that portion bear the risk of the unsold securities. This arrangement ensures that each member’s liability is determined strictly by their own share of the underwriting.

Key Characteristics

  1. Divided Liability: Each member is accountable solely for their own portion. If they are unable to sell their allocated share, they cannot compel other members to absorb these unsold securities.

  2. Risk Management: The risk of unsold securities is distributed among the members based on their committed shares, making it a preferred structure for underwriters who want to manage individual exposure.

  3. Securities Offering: This structure is typically used in underwriting various types of securities, including stocks, bonds, and other financial instruments.

How it Works

Formation

  1. Lead Underwriter: Typically, a lead underwriter (or bookrunner) is appointed to manage the public issuance and regulatory compliance aspects. The lead underwriter forms the syndicate and allocates specific portions of the issuance to each syndicate member.

  2. Allocation: Each member in a Western Account agrees to underwrite a specific portion of the securities being issued. The allocation is predefined and documented in the syndicate agreement.

Underwriting Process

  1. Once the syndicate is formed, the securities can be offered to investors.
  2. Each syndicate member is responsible for selling their allocated portion.
  3. Success of the issuance is contingent upon each member’s ability to distribute their shares.
  4. Should a member fail to sell their entire portion, they bear the financial liability for any unsold shares.

Case Example

To illustrate, consider a corporate bond issuance where an entity needs to raise $500 million. The lead underwriter decides to form a syndicate with five member firms, each taking on $100 million of the issuance. If one of the underwriting firms is unable to sell their $100 million allocation, they must manage the unsold portion themselves and cannot pass this liability onto the other four firms.

Comparison with Eastern Account

The primary distinction of a Western Account lies in the risk distribution model. In contrast, an Eastern Account, or Undivided Account, operates under shared liability among syndicate members. If any portion of the issuance remains unsold, the responsibility and subsequent liability are proportionately shared by all members based on their initial underwriting commitment.

Key Differences

Benefits and Drawbacks

Benefits of Western Account

Drawbacks of Western Account

Practical Implications

Corporate Finance

Corporations considering an issue of securities often deliberate between syndicates using Western versus Eastern Account structures based on market conditions, the nature of the security, and the risk tolerance of the underwriting firms involved.

Investment Banks

Investment banks analyze the size, scope, and risk associated with the offering to determine which syndicate account structure aligns best with their financial strategies and capabilities. For less liquid or riskier securities, a Western Account might be more appropriate to ensure controlled risk management and specified liability.

Market Dynamics

Market dynamics can influence the choice of the account structure. During bullish markets with high investor demand, underwriters might prefer a Western Account since the risk of unsold portions is minimal. Conversely, in bearish markets, an Eastern Account could distribute risk more equitably among syndicate members.

Real-World Example

Case of Initial Public Offerings (IPOs)

Consider several real-world IPOs managed by global financial institutions like Goldman Sachs, J.P. Morgan, and Citigroup. These institutions often form syndicates to distribute new shares to the public.

During Facebook’s IPO in 2012, a syndicate of over 30 financial institutions managed the offering. Each institution handled a portion of the shares to be issued. In a Western Account structure, if one member failed to sell their allocated portion, they would retain those shares and face the market risk individually.

For more detailed information about underwriting processes and syndicate structures, visit Goldman Sachs Underwriting Overview.

Conclusion

The Western Account is a specific type of underwriting syndicate structure that ensures members are only responsible for their allocated portion of securities, allowing for distinct risk management and predictability of liabilities. Its use is critical in financial markets, particularly in the context of seasoned offerings and IPOs, providing investment banks with a feasible pathway to manage financial exposure and distribute new securities efficiently.