Medium Term Notes and Corporate Bonds ?
Ocean Indian
Can anyone give me idea how Medium Term Notes and Coprorate bonds are
different in terms of underwriting process ?
Ocean Indian
Bond Guru
usually with a corporate bond the primary underwriter distributes a
preliminary offering statement (often called a prospectus or a 'red
herring' due to the red printing on it indicating it is not the final
document) to the selling group and allows them to review it. Though a
lot of negotiation with the selling group members and consultation with
potential institutional buyers of the bonds, the dollar amounts, coupon
rates, and maturity dates on the different bonds in the issue are fixed
shortly before the selling period begins. The members of the selling
syndicate receive their allocations for sale to their clients and then
the selling begins. Once all of the details of the issue are agreed
upon, the final O.S. can be produced and distributed. Once the bonds
are all sold in the primary market, the underwriter is done and moves
on to the next deal. Any bonds that become available from this issue
trade in the over-the-counter secondary market between dealers.
The process can be very similar for MTNs since they really are just
corporate bonds, but most of the MTNs are now being issued through the
structured note programs of LaSalle Bank (DirectNotes), InCapital
(InterNotes), or Merrill Lynch (CoreNotes). These notes are usually
shelf-registration paper which means that the offering statement is
already on file with the SEC and they can issue new paper each week
with new CUSIPs at the prevailing rates. So, there is no need to issue
prospectuses and offering statements for each issue. Every week is a
new issue and they typically sell as much as they can at the current
rates. The selling groups for these programs are huge - basically,
almost every dealer firm participates as a member of the selling group
for one or more of the notes programs and can sell the currently
available notes to their clients. There is no negotiation of rates
needed - the firm directing the note program pretty much decided what
the rates are going to be.
These MTNs are called structured notes or retail notes and are very
popular products with both issuers, dealers, and investors. For
issuers, they provide a good alternative to commercial paper that can
be sold to retail investors. In some ways, it makes available a whole
new source of capital for these issuers. For dealers, it gives them
product to sell that have recognizable, household names at competitive
yields and selling at par (thereby avoiding a lot of questions from
investors about premium vs. discount and tax treatment). Investors
like buying well-known names and most of product is highly rated (not
counting GMAC. ha!). There is also an active secondary market in this
product which gives the investors some additional liquidity over
traditional corporates.