STAGES IN ISSUANCE OF NON-GOVT BONDS

These are the steps in issuance of non-govt bonds:

• 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

Primary Market - Syndicate Pricing and Underwriting

Pricing and Underwriting Practices

On the primary market, borrowers may entrust syndicates with the task of trading their bonds. Syndicates consist of large investment banks that agree to purchase the entire bond issue from the borrower and resell it to investors. In this way, the issuer avoids the risk of being left with unsold securities.

Fees and Expenses
Syndicate members buy the issue from the borrower at a discount. This discount represents the par value of the issue minus the underwriting fees. In this way, they make a profit when they sell the issue to investors at par.

The underwriting fees of a new bond issue can be flexible or fixed, depending on the type of deal and the market. Underwriting fees usually consist of:

1. Management Fee
2. Selling Concession
3. Underwriting fee
4. Legal Cost
5. Printing Cost

Practices for pricing and underwriting a new bond
When pricing and underwriting a new bond issue, there are a number of practices followed by the syndicate members.

• Traditional open pricing
• Bought deal
• Pre-priced deal
• Fixed price re-offer
• Pot deal
• Price stabilization

Traditional Open Pricing

In traditional open pricing, the underwriters have the ability to change the price and coupon any time up to the offering day – the day the bond is put on the market. This is to minimize any losses due to changes in market sentiment during the subscription period – i.e., the period from announcement day to offering day.

After analyzing the 'book', if it is found that there is more demand for the issue than supply, the price or coupon can be changed in the issuer's favor. If, prior to the offering day, the issuer is unhappy with pricing, the issue can be canceled.


Bought Deal
A bought deal is an offering in which the underwriters or syndicate purchase the entire bond issue and resell it. This only happens if underwriters are confident they can sell the bonds. The Eurobond market often operates on the bought deal basis.

The issuer approaches issuing houses giving details of the type of issue it wants and requesting bids at a fixed price. The period between the request and having to submit a bid is normally only a few hours.

After a bid has been accepted, the issuing house is the legal owner of the issue and is obliged to purchase the issue from the borrower at the quoted fixed price, even if market conditions change.


Often with the bought deal, the lead manager – usually a large global securities house – doesn't syndicate the issue. Instead, it places the entire issue itself. If it does syndicate the deal, it quickly spreads the risk between syndicate members. This process has made the market for new issues extremely competitive and concentrated.

In the case of the bought deal, there is no flexibility in the pricing of the issue during the subscription period. Fear of adverse market conditions can also result in the subscription period being brought forward.


Pre-Priced Deal
A pre-priced deal is very similar to a bought deal. In a pre-priced deal, the price is agreed between the underwriter and the borrower immediately prior to launch.

The issue is then syndicated in the same manner as an open priced issue except that there is generally no, or only a very short selling period.

Fixed Price Re-offer
Fixed price re-offer refers to a syndicate discipline, strongly enforced on the US market, where the underwriting banks agree to sell bonds to investors at no less than an agreed price. This method is mainly used to sell large issues to institutional investors.

The fixed price is usually maintained for 24 hours after the offering. This practice ensures transparency in the primary market – investors are assured that they cannot get the bonds cheaper from another dealer while the issue is in syndication.

For the issuer, the fixed price re-offer method has the advantage of lower underwriting fees.

Price Stabilization
Lead managers support trading in the primary market immediately after the offering. The issue price is stabilized using a stabilization fund that is taken account of in the fees charged to the issuer. The lead manager will buy back bonds that are under selling pressure and sell bonds to the market when there is excess demand.

The issue is only allowed to move within a certain price range over a given period. In order to achieve this, the lead manager allots bonds to the syndicate, either in excess of or falling short of the full issue amount.

By over-allotting the issue, going short, the lead manager must buy back bonds from the market to cover the short position. By going long, the lead manager will hold the remaining bonds for sale in the secondary market to satisfy excess investor demand. Through these activities the price is stabilized.