How Banks Provide Mtn Offerings To The Investment Sector

By: marcelford
The process of raising funds in the public MTN market usually begins when a corporation files a shelf registration with the SEC. Once the SEC declares the registration statement effective, the borrower files a prospectus supplement that describes the MTN program. The amount of debt under the program generally ranges from $100 million to $1 billion. After establishing an MTN program, a borrower may enter the MTN market continuously or intermittently with large or relatively small offerings. Although underwritten corporate bonds may also be issued from shelf registrations, MTNs provide issuers with more flexibility than traditional underwritings in which the entire debt issue is made at one time, typically with a single coupon and a single maturity.

The registration filing usually includes a list of the investment banks with which the corporation has arranged to act as agents to distribute the notes to investors. Most MTN programs have two to four agents. Having multiple agents encourages competition among investment banks and thus lowers financing costs. The large New York-based investment banks dominate the distribution of MTNs.
Through its agents, an issuer of MTNs posts offering rates over a range of maturities: for example, nine months to one year, one year to eighteen months, eighteen months to two years, and annually thereafter. Many issuers post rates as a yield spread over a Treasury security of comparable maturity. The relatively attractive yield spreads posted at the maturities of three, four, and five years shown in table 2 indicate that the issuer desires to raise funds at these maturities. The investment banks disseminate this offering rate information to their investor clients. When an investor expresses interest in an MTN offering, the agent contacts the issuer to obtain a confirmation of the terms of the transaction. Within a maturity range, the investor has the option of choosing the final maturity of the note sale, subject to agreement by the issuing company. The issuer will lower its posted rates once it raises the desired amount of funds at a given maturity. As an example, the issuer might lower its posted rate for MTNs with a five-year maturity to 40 basis points over comparable Treasury securities after it sells the desired amount of debt at this maturity. Of course, issuers also change their offering rate scales in response to changing market conditions. Issuers may withdraw from the market by suspending sales or, alternatively, by posting narrow offering spreads at all maturity ranges. The proceeds from primary trades in the MTN market typically range from $1 million to $25 million, but the size of transactions varies considerably. After the amount of registered debt is sold, the issuer may "reload" its MTN program by filing a new registration with the SEC.

Although MTNs are generally offered on an agency basis, most programs permit other means of distribution. For example, MTN programs usually allow the agents to acquire notes for their own account and for resale at par or at prevailing market prices. MTNs may also be sold on an underwritten basis.