In the context of bonds, an underwriter is a company, such as an investment bank, that buys a new issue of bonds directly from the issuer. Rather than selling the bonds directly to hundreds or thousands of individual investors, the issuer instead sells the entire issue to the underwriter. After purchasing the bonds, the underwriter then sells them to investors, such as companies or individuals. If it cannot find enough buyers, the underwriter holds the remaining bonds until it can sell them at a favorable price.
The underwriter makes its money off the underwriting spread, or the difference between the price it pays the issuer for the bonds and the price at which it sells the same bonds to other investors. The underwriter may purchase the bonds through a competitive bid or negotiated sale.
To share the risks or pool their money for a large issue, multiple underwriters may form a group called a syndicate. The senior managing underwriter takes the lead role, and often works closely with the issuer in a negotiated sale. The senior manager, also called the bookrunning manager, allocates the bonds to be sold to investors between itself and the other underwriters (co-managers) according to the agreement among underwriters.
A smaller selling group may be formed within the syndicate. Broker-dealers may be part of the selling group without being co-managers. While members of the selling group help sell the bonds to investors, they are not required to hold or underwrite any bonds that cannot be sold. In return, they receive a smaller share of the profits.
