Why would a company have a medium-term note program? Like a shelf registration statement, an MTN program enables a company to sell a wide range of debt securities without having to complete the SEC’s registration or review process for each issuance. See “How are MTN programs registered?” In addition, an MTN program uses a master set of disclosure documents, agreements with selling agents or dealers, and issuing and paying agency agreements to help minimize the new documentation that is needed for each offering.
Who develops MTN programs?
Historically, many MTN programs were developed by the commercial paper departments of investment banks. Securities from these programs were offered and sold on a principal or agency basis from a broker-dealer’s trading desk. The programs often were administered by a bank’s specialty group rather than through the typical relationship bankers.
What types of issuers establish MTN programs?
Are the debt securities in an MTN program ever guaranteed by an entity other than the issuer?
Yes. Particularly among financial institution issuers, it is common for an operating subsidiary (such as a bank subsidiary of a bank holding company) to have a higher credit rating on its indebtedness than the parent corporation (such as a bank holding company). Accordingly, many MTN programs are structured so that: the operating subsidiary is the actual issuer of the securities, and the parent holding company is the guarantor; or
the parent holding company is the issuer of the securities, and one or more operating subsidiaries are guarantors.
What types of offerings are completed using MTN programs?
In light of the convenience offered by shelf registration and MTN programs, issuers use MTN programs: to effect small and medium-sized offerings of debt securities to investors that seek specific terms (known as “reverse inquiry” trades) (see “What are “reverse inquiry” transactions, and how do they impact the MTN market?”); to effect large syndicated offerings of debt securities that might, in the absence of an MTN program, be offered through a shelf-takedown; to offer structured notes, such as equity-linked, currency-linked, and commodity-linked securities; and to operate a “retail note program,” in which an issuer offers debt securities with small minimum denominations to “retail” investors.
What types of securities normally are sold through medium-term note programs?
Who sets the terms of medium-term notes?
Similar to the commercial paper market, the traditional market for MTNs is investor-driven. Dealers continuously offer MTNs within a specific maturity range, and an investor can negotiate to have the dealer meet its particular investment needs at a specific maturity level. See “What types of offerings are completed using MTN programs?” Investors in MTN securities make their investment decisions based upon credit ratings, an evaluation of the issuer and its business, the maturity of the notes, and the yield on the notes. MTN buyers include the institutional buyers of underwritten corporate debt securities. In the case of structured products and retail notes sold from an MTN program, individual investors also may be purchasers.
Are medium-term notes sold on a firm commitment basis or a best efforts basis?
It varies. The dealer’s traditional obligation is to sell the MTN securities on a “best efforts” basis. However, on occasion, competitive pressures result in a dealer purchasing MTN securities as principal. In addition, large syndicated MTN offerings often are effected on a firm commitment basis. In both cases, the MTN dealer is usually regarded as an “underwriter” for Section 11 purposes.
How are MTNs “posted” and sold?
Issuers are likely to lower their posted rates once they raise the desired amount of funds at a given maturity. In addition, issuers will change their offered rates as market conditions and prevailing interest rates change. Issuers may effectively withdraw from the market by suspending sales or, alternatively, by posting narrow offering spreads over the comparable Treasury yields at all of the posted maturity ranges.
When an investor expresses interest in an MTN offering, the selling agent contacts the issuer to obtain a confirmation of the terms of the transaction. Within a range, the investor may have the option of selecting the actual maturity of the notes, subject to final agreement by the issuer.
What are “reverse inquiry” transactions, and how do they impact the MTN market?
Investors often play an active role in the MTN market through the “reverse inquiry” process. An investor may seek an investment in a specified principal amount, with a specified credit rating, and a specified maturity. If a security with the desired terms is not available in the corporate bond market, the investor may be able to obtain it in the MTN market through reverse inquiry. In this case, the investor will communicate the terms of the investment it is seeking to an issuer of MTNs through the issuer’s selling agent. If the issuer finds the terms of the reverse inquiry acceptable, it may agree to the transaction even if it was not posting rates at the desired maturity.
Reverse inquiry transactions play an important role in both “plain vanilla” debt issued in MTN programs and more exotic structured securities.
What is a “retail MTN” program?
A “retail MTN program” is specifically designed to offer debt securities to the retail market, while maintaining administrative costs to issuers at acceptable levels. In order to achieve those objectives, the process of issuing retail MTNs may differ slightly from the process of selling MTNs to institutions.
In one type of retail MTN program, an issuer will post rates weekly with retail and/or regional brokers. During the week that these rates are posted, the brokerage firms market the securities to retail investors, who place orders in the applicable minimum denominations. At the end of the week, the retail and regional brokerage firms will contact the corporate issuer and indicate the aggregate amount of orders for notes at each maturity, and the corporation will issue one series of notes at each maturity. For example, several hundred retail investors could place orders for MTNs with maturities of two and five years, but the administrative costs for the corporate issuer would reflect only two issuances from the shelf registration.
Significant U.S. arrangers for retail MTNs include Incapital (and its InterNotes program) and Merrill Lynch.
The Working Group in an MTN Program
What is the role of the arranger of an MTN program?
The arranger of an MTN program serves a variety of roles, including:
-serving as principal selling agent for the MTN securities;
-advising the issuer as to potential financing opportunities in the MTN market;
-communicating to the issuer any offers from potential investors to buy MTNs;
-advising the issuer as to the form and content of the offering documents, including the types of securities to be included;
-helping the issuer draft the offering documents and related program agreements;
-negotiating the terms of the agreements on behalf of itself and the other selling agents;
-coordinating settlement of the MTN securities with the issuer, the trustee, and the paying agent; and
-making a market in the issued and outstanding securities issued under the program.
What is the role of the other selling agents in an MTN program?
The MTN program may have selling agents other than the arranger who offer the issuer’s securities. Having multiple selling agents encourages competition among the selling agents to market the issuer’s securities, and may lower the issuer’s financing costs for securities issued under the program. In addition, having more selling agents quote prices for the MTN securities may lead to more “reverse inquiry” transactions. See “What are “reverse inquiry” transactions, and how do they impact the MTN market?”
How do the selling agents conduct due diligence with respect to an MTN program?
Whether the selling agents are acting on a “best efforts” or “firm commitment basis” in connection with a takedown, they are subject to liability as “underwriters” under Section 11 of the Securities Act. See Are medium-term notes sold on a firm commitment basis or a best efforts basis? However, because takedowns from a program may be frequent, and often occur on short notice, the selling agents are not likely to be able to initiate and complete a full due diligence process at the time of each offering. Accordingly, it is fairly common for the selling agents on an active MTN program to conduct “ongoing due diligence” with respect to the issuer, so that their investigation is complete and up-to-date at the time of each takedown.
With respect to so-called “legal due diligence,” the issuer under an MTN program will often designate a law firm, known as “designated underwriters’ counsel,” to conduct ongoing legal due diligence, and to share its material findings with the relevant selling agents on a particular takedown.
What is the role of regional dealers in the MTN market?
At one time, the major New York-based investment banks distributed nearly all MTN securities to investors. As the market matured, regional dealers began to play a larger role in selling MTNs. Regional dealers receive information about MTN issuers’ offering rates from MTN selling agents. In turn, the regional dealers communicate this information to their investor clients.
When an investor buys an MTN through a regional dealer, the dealer typically receives a selling concession from the MTN selling agent. These placements through regional dealers improve efficiency in the market by broadening the potential investor base for MTNs.
What is the role of the trustee or paying agent in an MTN program?
The trustee or paying agent in an MTN program serves a variety of roles, including:
-processing payments of interest, principal, and other amounts on the securities from the issuer to the investors;
-communicating notices from the issuer to the investors;
-coordinating settlement of the MTN securities with the issuer and the selling agent;
-assigning security identification codes to the MTN securities (in the case of U.S. programs, the trustee typically obtains a block of CUSIP numbers for the relevant issuer’s program and assigns them on an issue-by-issue basis);
-processing certain tax forms that may be required under the program; and
-in the case of a trustee of a series of U.S.-registered notes, acting as representative of the investors in the event of any claim for payment if a default occurs.
Registration of Medium-Term Note Programs –Offering Documents
How are MTN programs registered?
MTN programs typically are registered on a shelf registration statement under Rule 415.
Issuers that are “primarily eligible” to use Form S-3 or Form F-3 may file a shelf registration statement under clause (x) of Rule 415(a)(1), permitting continuous or delayed offerings. MTN issuers not eligible to use Form S-3 or Form F-3 are limited to continuous offerings under clause (ix), may not wait to commence offers once the registration statement has been declared effective, and must be offering the securities on a continuous basis. Accordingly, MTN programs generally are limited to larger public companies, with at least a $75 million public equity float.
Companies can register MTN programs on Form S-1 or Form F-1. However, this is rarely done due to the potential need to update the MTN registration statement to reflect developments in the issuer’s business and finances.
Are MTN programs always registered with the SEC?
No. Some MTNs are offered in bank note programs exempt from registration under Section 3(a)(2) of the Securities Act of 1933, or in Rule 144A programs in which the securities are offered exclusively to qualified institutional buyers. In the past, some issuers operated programs that were conducted as private placements in continuous Section 4(2) programs. In addition, issuers may establish Regulation S programs in which the securities are offered outside the United States, such as in the case of European Medium-Term Note Programs (“EMTNs”), Global Medium-Term Note Programs (“GMTNs”), or Australian Medium-Term Note Programs (“AMTNs”). Two or more of these types of programs may be combined, such as an EMTN program that also provides for the issuance of securities to qualified institutional buyers in the United States under Rule 144A.
Non-U.S. issuers that wish to access the debt markets in the United States without registering under the Securities Act often establish a Rule 144A program and/or a Section 3(a)(2) program (if they are banks).
Typically, the offering circular and settlement process for non-registered MTN programs are somewhat similar to registered MTNs. The primary difference is the nature of the offerees.
What offering documents are used in an MTN program?
The issuer’s registration statement for an MTN program typically consists of:
-a “universal” shelf registration statement for debt and other securities; or
-a shelf registration statement providing only for debt securities; or
-a prospectus pertaining to the MTN program itself.
In the first two cases, after its registration statement becomes effective (or upon filing, in the case of a well-known seasoned issuer, or “WKSI,” filing an automatically-effective shelf registration statement), the issuer will prepare and file an “MTN prospectus supplement” under Rule 424(b) that describes the securities to be issued under the MTN program and provides the names of the selling agents. See “What is a prospectus supplement?” in these FAQs. Traditionally, the prospectus supplement sets forth the aggregate U.S. dollar amount of the securities that may be offered under the program. Many WKSIs no longer provide that amount, because a WKSI shelf-registration statement is not required to specify the aggregate amount of securities that will be issued.