These are the steps in issuance of non-govt bonds:
Origination
Origination is the first stage in the process for distributing non-government bonds on the primary market. Origination occurs when a borrower authorizes an investment bank to manage new bond issues on its behalf.
The bank purchases the bonds from the borrower and distributes them to investors – a process known as underwriting. In this way, the issuer avoids the risk of being left with unsold bonds.
Selecting a Lead Manager
Lead manager - A bank that has been chosen to manage new bond issues on behalf of a borrower is known as lead manager
The borrower has two options when selecting a lead manager.
1. Build on an existing investment banking relationship
The borrower can decide to choose an investment bank with which they have an established relationship. In this case, the borrower negotiates the terms and conditions of the issue with the bank.
Depending on the size of the issue, the investment bank may invite other banks to share the risk and help sell the issue.
2. Request tenders from different investment banks
The borrower can request tenders from a group of investment banks. The borrower can provide the banks with details such as the size and currency of the transaction and the banks submit their tenders based on this information.
Alternatively, if investment banks are aware that an issuer is considering origination, they may approach the issuer with proposals even before the issuer makes a request.
Syndication
The lead manager rarely has the resources to underwrite the entire bond issue. For this reason, the lead manager may decide to form a syndicate to share the risk with other investment banks or security houses. This process is called syndication.
On the day the issuer announces the bond issue the lead manager invites other banks and security houses to join the syndicate.
Between them, the syndicate members purchase the entire bond issue and resell it to investors. In some cases, they only purchase the issue on a 'best efforts' basis. This means that they agree to sell as much of the issue as they can and return the rest to the issuer.
Besides underwriting the bond issue, the syndicate is also responsible for bond pricing and bond listing.
Bond Pricing
Syndication: Bond Pricing
Bonds are not always priced at the total principal amount. Some bonds can be priced at less than the principal amount and others can be priced at more.
Syndication: Bond Pricing
When deciding on the issue price, the syndicate considers the coupon and the yield.
Determining Coupon
In general, the lead manager aims to price bonds as close as possible to par. To achieve this, the lead manager observes yields and maturities of similar bonds on the market and then assigns a coupon rate to the issue based on the market trends.
Coupons are generally fixed in even multiples of 1/8 of a percent. Yields, however, vary depending on interest rates. In general, if the market yield is greater than the coupon, the bond trades below par. If the yield is smaller than the coupon, the bond trades above par.
Lead managers normally choose a coupon so that the new issue price will be as close as possible to, but lower than, 100%.
Syndication: Bond Pricing
Determining Yields
Issuing bonds above or below par influences the yield of a new issue. The yield is the return you earn on a bond and is expressed as a percentage of the amount you paid for the bond. If a bond is issued below par, the investor's yield is increased. If it is issued above par, the yield is reduced.
The determination of yield on a new issue is relative to some benchmark, often a government bond with the same maturity and currency as the new issue.
New non-government bond issues are priced to give a greater yield than government bonds because non-government bonds are more risky.
In order to determine the yield on the new issue, investment bankers consider:
the spread on similar bonds from the issuer on the secondary market
bonds from comparable issuers (if the issuer has no similar bonds)
the pricing of the issue on the gray market
how frequently the borrower has issued bonds on the market
Syndication: Bond Listing
It is not necessary to list bonds on the stock exchange. In fact, most bonds are rarely traded on stock exchanges because it is more costly and less flexible than the over-the-counter market. Eurobonds however, are normally listed on one or more stock exchanges, the most common being London and Luxembourg.
In order to list bond issues on a stock exchange, syndicates must submit an application.
Reasons for Listing
Bond issues are listed for the following reasons:
To make securities available to the widest possible range of investors
To assist in the initial placement of an issue and its subsequent marketability
To provide good value to the borrower
To advertise: it reminds people who read the financial newspapers of the borrower's existence
- Origination
- Syndication
- Distribution
Origination
Origination is the first stage in the process for distributing non-government bonds on the primary market. Origination occurs when a borrower authorizes an investment bank to manage new bond issues on its behalf.
The bank purchases the bonds from the borrower and distributes them to investors – a process known as underwriting. In this way, the issuer avoids the risk of being left with unsold bonds.
Selecting a Lead Manager
Lead manager - A bank that has been chosen to manage new bond issues on behalf of a borrower is known as lead manager
The borrower has two options when selecting a lead manager.
1. Build on an existing investment banking relationship
The borrower can decide to choose an investment bank with which they have an established relationship. In this case, the borrower negotiates the terms and conditions of the issue with the bank.
Depending on the size of the issue, the investment bank may invite other banks to share the risk and help sell the issue.
2. Request tenders from different investment banks
The borrower can request tenders from a group of investment banks. The borrower can provide the banks with details such as the size and currency of the transaction and the banks submit their tenders based on this information.
Alternatively, if investment banks are aware that an issuer is considering origination, they may approach the issuer with proposals even before the issuer makes a request.
Syndication
The lead manager rarely has the resources to underwrite the entire bond issue. For this reason, the lead manager may decide to form a syndicate to share the risk with other investment banks or security houses. This process is called syndication.
On the day the issuer announces the bond issue the lead manager invites other banks and security houses to join the syndicate.
Between them, the syndicate members purchase the entire bond issue and resell it to investors. In some cases, they only purchase the issue on a 'best efforts' basis. This means that they agree to sell as much of the issue as they can and return the rest to the issuer.
Besides underwriting the bond issue, the syndicate is also responsible for bond pricing and bond listing.
- Bond Pricing
- Bond Listing
Bond Pricing
Syndication: Bond Pricing
Bonds are not always priced at the total principal amount. Some bonds can be priced at less than the principal amount and others can be priced at more.
Syndication: Bond Pricing
When deciding on the issue price, the syndicate considers the coupon and the yield.
Determining Coupon
In general, the lead manager aims to price bonds as close as possible to par. To achieve this, the lead manager observes yields and maturities of similar bonds on the market and then assigns a coupon rate to the issue based on the market trends.
Coupons are generally fixed in even multiples of 1/8 of a percent. Yields, however, vary depending on interest rates. In general, if the market yield is greater than the coupon, the bond trades below par. If the yield is smaller than the coupon, the bond trades above par.
Lead managers normally choose a coupon so that the new issue price will be as close as possible to, but lower than, 100%.
Syndication: Bond Pricing
Determining Yields
Issuing bonds above or below par influences the yield of a new issue. The yield is the return you earn on a bond and is expressed as a percentage of the amount you paid for the bond. If a bond is issued below par, the investor's yield is increased. If it is issued above par, the yield is reduced.
The determination of yield on a new issue is relative to some benchmark, often a government bond with the same maturity and currency as the new issue.
New non-government bond issues are priced to give a greater yield than government bonds because non-government bonds are more risky.
In order to determine the yield on the new issue, investment bankers consider:
the spread on similar bonds from the issuer on the secondary market
bonds from comparable issuers (if the issuer has no similar bonds)
the pricing of the issue on the gray market
how frequently the borrower has issued bonds on the market
Syndication: Bond Listing
It is not necessary to list bonds on the stock exchange. In fact, most bonds are rarely traded on stock exchanges because it is more costly and less flexible than the over-the-counter market. Eurobonds however, are normally listed on one or more stock exchanges, the most common being London and Luxembourg.
In order to list bond issues on a stock exchange, syndicates must submit an application.
Reasons for Listing
Bond issues are listed for the following reasons:
To make securities available to the widest possible range of investors
To assist in the initial placement of an issue and its subsequent marketability
To provide good value to the borrower
To advertise: it reminds people who read the financial newspapers of the borrower's existence
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