Bond issuance is the process through which a borrower raises money by creating new debt securities and selling them to investors. The borrower, called the issuer, promises to pay interest and to repay the principal on set dates. Issuers include national governments, local authorities, supranational bodies, banks and non-financial companies.
Issuance takes place in the primary market, where securities are sold for the first time and the proceeds go to the issuer; see primary market issuance. Afterwards the bonds change hands between investors through secondary market trading. Governments mostly sell bonds by auction on a regular calendar, while companies and other borrowers usually appoint banks to place each issue with investors. This entry concentrates on the second route.
Parties to an issue
A syndicated bond issue brings together several specialised roles:
- Lead managers. One or more banks, acting as bookrunners, advise on structure and timing, market the bonds and commit to place them. Together with any co-managers they form the underwriting syndicate.
- Legal counsel. Separate law firms act for the issuer and for the managers, drafting the documents and carrying out due diligence.
- Rating agencies. Most public issues carry a credit rating from one or more agencies.
- Trustee or fiscal agent. A bond trustee represents the holders, or a fiscal agent acts for the issuer where no trustee is appointed.
- Paying agent and registrar. The paying agent distributes interest and principal, and a registrar records ownership of registered bonds.
- Depository. The bonds are held and settled through a national depository or an international central securities depository (ICSD).
Documentation
The main disclosure document is the prospectus or offering circular, which describes the issuer, its finances, the risks and the terms of the bonds. Frequent borrowers set up a programme, often called a medium-term note programme, with a base prospectus updated each year, so that each new issue needs only a short document of final terms. In the United States, a comparable result is achieved through shelf registration.
The legal terms are set out in the conditions of the bonds and in a trust deed, an indenture or a fiscal agency agreement. They cover the coupon, maturity, ranking, covenants, events of default, tax provisions and governing law. A subscription or underwriting agreement records the managers' commitment to buy the bonds and the fees they receive.
The issuance process
The steps of a typical new issue are as follows. The issuer awards a mandate to the lead managers, who prepare documents, obtain ratings and agree the target size and maturity. Where the issuer is new to the market, a roadshow of investor meetings is held.
On the launch day, the managers announce the deal with initial price guidance, expressed as a spread over a benchmark government bond or swap rate. Investors place orders, and the managers collect them in a process of book building. Guidance is tightened if demand is strong. The books close, the final spread is set, the coupon is fixed at pricing, and bonds are allocated to investors. The whole of this stage often takes only a few hours for an established borrower.
Between pricing and closing, usually a few business days, the legal documents are signed, the bonds are assigned an ISIN and admitted to listing, and a global certificate representing the whole issue is lodged with the depository. On the closing date investors pay and receive their bonds, and the issuer receives the proceeds net of fees.
Other routes to market
Not every bond is publicly syndicated. In a private placement, bonds are sold directly to a small number of institutions with lighter documentation. Governments rely on auctions in which dealers bid for set amounts. Retail offers, sold in small denominations over a subscription period, are used in some markets. Bonds sold internationally outside the issuer's home market are traditionally known as Eurobonds.
Regulation
Securities law governs what must be disclosed and to whom bonds may be offered. In the European Union and the United Kingdom, a prospectus approved by the regulator is required for public offers and for admission to a regulated market, with exemptions for offers limited to qualified investors or made in large denominations. In the United States, public offers must be registered with the securities regulator unless an exemption applies, such as the rule that permits resales to large institutional buyers. Managers are also subject to rules on product governance, allocation, conflicts of interest and price support, the last of which is covered under stabilisation.
Costs and risks for the issuer
An issuer pays underwriting fees, legal, rating, listing and agency costs, and usually a small new issue premium over the yield on its existing bonds to attract buyers. The main risk is market timing: a sudden rise in yields or a fall in investor confidence can make an issue more expensive or force it to be postponed. The coupon rate fixed at pricing determines the cost of the debt for its whole life unless it is later hedged or refinanced.