Do you know what is Green Shoe Option?

Recently, Lippo Malls Indonesia Retail Trust (LMIR Trust) announced that they have obtained up to S$350 Million term loan facilities with a Green Shoe option of up to S$70 million. The proceeds will be used to fund acquisitions and refinance existing debt.

The term “Green Shoe Option” caught my eye. Initially, I thought it was the name of a new mall Lippo is planning to acquire, however upon further reading into the announcement, it doesn’t seem so.

What is a Green Shoe Option?

The following was found after I googled for the term “Green Shoe Option”.

A greenshoe is a clause contained in the underwriting agreement of an initial public offering (IPO) that allows underwriters to buy up to an additional 15% of company shares at the offering price. The investment banks and brokerage agencies (the underwriters) that take part in the greenshoe process have the ability to exercise this option if public demand for the shares exceeds expectations and the stock trades above the offering price. – Investopedia

Is Green Shoe a Company Name?

Yes, if you guess it right! Upon further reading, “Green Shoe” is the name of a company call “Green Shoe Manufacturing Company” which was founded in 1919 and now known as “Stride Rite Corporation”. Apparently, they were the first company to implement the “over allotment option” and thus this option was also termed as “Green Shoe option”.

How does it Work?

In simple terms, it means the underwriter (dealer) can stabilize fluctuating share prices by increasing (selling) or decreasing (buying) the supply of shares according to public demand.