What risk do underwriters face in a bought deal follow-on offering?

In a bought deal follow-on offering, underwriters face the fundamental risk of not being able to sell shares at the expected price. In this type of transaction, the underwriter commits to purchasing the entire offering from the issuer at a predetermined price before the shares are sold to the public. Consequently, if market conditions fluctuate unfavorably after the deal is priced but before the shares are sold, the underwriter may find themselves holding shares that cannot be sold at the anticipated market value. This exposure to changes in market sentiment or demand can lead to financial losses for the underwriter if the shares need to be sold at a lower price than initially expected.

This risk is particularly heightened in volatile markets, where stock prices can change rapidly. The success of the offering heavily relies on the accurate assessment of market demand and timing, making the potential for not selling shares at the expected price a significant concern for underwriters in these situations.