The Issuance of Debt Securities - EPFSF · The Issuance Process ... balance sheet, cash flow...

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The Issuance of Debt SecuritiesIssue Briefing on Bond Prospectuses7 May 2003

by Melanie PoeppingDeutsche Bank Aktiengesellschaft

The Issuance of Debt Securities

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I. Debt Securities

II. The Euro Market

III. The Issuance Process

IV. The Documentation Process

V. Specific Issues

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I. Debt SecuritiesWhat are Debt Securities?


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DefinitionWhat are Debt Securities?

Several names for the same thing:

n Bonds

n Notes

n Debt Instruments

n Debt Securities

Issued in several ways:

n Stand-Alone

n Programme

– Medium Term Note Programme

– Debt Issuance Programme

– Note Programme

– Debt Issuance Facility

n Private Placement

n Public (syndicated) Placement


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The Debt SecuritiesWhat types of Debt Securities exist?

Products in the market:

n Eurobond– a bond denominated in any currency issued by an international syndicate

and offered to investors in a number of countries at the same time

n Domestic Bond– a bond denominated in the currency of the country where it is issued

n Global Bond– a bond issued and traded outside the country whose currency it is

denominated in, and outside the regulations of a single country; usually abond issued by a non-European company for sale in Europe or vice versa

n US Domestic Bonds

n Pfandbriefe


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The Debt SecuritiesWhat kind of structures of Debt Securities exist?

Structures in the market:

n straight debt

– fixed rate coupon

– floating rate coupon

n unsubordinated bonds

n public Pfandbriefe

n asset backed securities

n repackaged bonds

n exchangeable bonds

n structured debt

– indexed linked coupon

– reference rate coupon

n subordinated bonds

n mortgage Pfandbriefe

n mortgage backed securities

n high yield bonds

n convertible bonds


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The Debt SecuritiesHow are they issued?

n Debt Issuance Programme

– documentation framework under which the issuer is able to access thepublic and private capital markets in a wide range of currencies, maturitiesand innovative structures, without providing all documents (prospectus,dealer agreement, fiscal agency agreement) again for each issue

– the programme is listed on one or more stock exchanges and needs to beupdated annually

– issues under the programme are documented by a pricing supplement

n Stand alone

– single documentation for a specific bond issue (prospectus, dealeragreement, fiscal agency agreement) providing detailed information aboutthe issue and its terms and conditions

– prospectus will never be updated again except for an increase

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II. The Euro MarketIssuers and investors


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IssuersWho issues Debt Securities?

Various industry groups issue Debt Securities:

n corporations

n financial institutions

n insurance companies

n supra-nationals

n sovereigns

n governmental agencies


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IssuersWhy do they issue Debt Securities?

Various reasons lead to the decision:

n get access to the capital markets

n gain a broad international and geographically diverse investor base

n gain publicity

n cover financial risks

n cover financing needs



InvestorsWho invests in Debt Securities?

Deutsche Bank’s Investor base :

n usually institutional investors(the “professionals”) from thesame industry group as theissuers and private investors(the “retail market”)

n sales are carried out in26 centres around the world,by a total of more than540 professionals

Investor nationality by volume

Japan20%

Germany15%

Hong Kong15%

United States9%

United Kingdom8%

Other6%

Switzerland5%

Netherlands1%

France4%

Portugal3%

Singapore3%

Italy4%

Luxembourg2% Philippines

2%

Spain2%

Ireland1%

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III. The Issuance ProcessBusiness Perspective



The Issuance Process“Using the window of opportunity”

Example: Issuance of a Eurobond on a stand-alone basis

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Mandate LetterTime Table

16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Credit ResearchRating Advisory

Preliminarynegotiation of

legal documents

Raising investor interest throughroadshow, one-on-one meetings

Start of bookbuilding period

(indicative price)

Drafts and negotiation of legal documents

PreliminaryProspectus

“Red Herring”

Start of listing process

Launch

Pricing

End of roadshow

Invitation ofsyndicate

Finalising of legal documents

Finalising ofProspectus

Signing ofagreements

Settlement / ClosingListing

ApprovalDrafts and negotiation

of legal documents and prospectus Other legal / transaction mattersDue

Diligence



The Issuance Process“Using the window of opportunity”

Example: Issuance of a syndicated bond under a programme

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Start of bookbuilding period

(indicative price)

Drafts andnegotiation

of legaldocuments

Launch

PricingInvitation ofsyndicate

Prospectus forthe programmealready exists

Signing ofagreements

Settlement / Closing

ListingApproval

Legal documentationframework for an

issue already exists

SendingPricing

Supplementto the StockExchange

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IV. The Documentation ProcessLegal and Transaction Management Perspective



The Documentation ProcessThe main documents

General Overviewn Prospectus

– Offering Circular, Information Memorandum, Listing Circular etc.

n Bond Purchase Agreement

– Subscription Agreement, Dealer Agreement

n Fiscal Agency Agreement

– Issue and Paying Agency Agreement

n Operations Memorandum

– Signing and Closing Agenda



The Documentation ProcessTransaction related issues

Debt Issuance Programmen Prospectus contents

– summary of the programme

– terms and conditions for a variety of possible bond structures

– form of pricing supplement

– form of guarantee, if any

– description of the issuer / guarantor

– extract of the financial statement(s) of the issuer / guarantor

profit & loss, balance sheet, cash flow statement, notes, auditors report,management report, outlook

– selling restrictions / taxation notes

– general information (listing, authorisation)



The Documentation ProcessTransaction related issues

Stand Alonen Prospectus contents

– important notice for investors

– terms and conditions for a specific bond structures

– form of guarantee, if any

– description of the issuer / guarantor

– extract of the financial statement(s) of the issuer / guarantor

profit & loss, balance sheet, cash flow statement, notes, auditors report,management report, outlook

– selling restrictions / taxation notes

– general information (listing, authorisation)

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V. Specific IssuesRetail Market and Denomination, Listing andIncrease of Bonds



2

260 325

770

35

250

Number of branches for Privateand Business Clients

Specific IssuesRetail Market

The importance of private investors is growing

n change of investment behavior in difficult economic environment

– bond market as “safe haven”

n more “educated” investors as in previous years

n 20% of total bond size for retail investors

n professionals (e.g. saving banks,retail banks) buy bonds in orderto re-sell them into the retail market

n reaching a wide range of investorsin all European countries



Specific IssuesRetail Market

Requirements for the retail marketEnabling private investors to diversify their portfolio:

n small denominations

– EUR 1,000 or any equivalent in other currencies

n offering a wide range of bond structures

– taking into account the possible risk factors of the structure

n offering guaranteed bonds



Specific IssuesListing of Bonds

Bond issued under a programme

n the prospectus is already listedat the stock exchange

n pricing supplement is seen assupplement to the prospectus -with information to the specificbond

n all issues under theprogramme within the followingyear will be automatically belisted at the stock exchange

n maximum time: 2 days

Bond issued as stand alone

n prospectus needs to beapproved by the relevant stockexchange

n prospectus will be filed with thestock exchange andamendments will be discussed

n maximum time (depending onthe stock exchange): 15 days

n no extension of this period



Specific IssuesIncrease of Bonds

Bond issued under a programme

n no change of the prospectus

n pricing supplement is seen assupplement to the prospectus

n new pricing supplement for theincrease

Bond issued as stand alone

n increase is shortly after theoriginal issue

– “wrap-around” to the originalprospectus of the issue

– giving detail of the increase

n increase a while after theoriginal issue

– supplemental prospectus

– giving detail of the increaseand referring to the originalprospectus

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The Issuance of Debt Securitiesby Melanie Poepping / Deutsche Bank AG

Appendix A: Glossary

Asset-backedSecurities

Instruments for transforming claims tied up in the balance sheetinto negotiable securities.

Bloomberg Bloomberg is an electronic financial information platform oftenused for the publication of company and financial marketinformation (e.g. ad-hoc-publication service).

Bond An interest bearing or discounted government or corporatesecurity that obligates the issuer to bay the bond holder aspecified sum of money, usually at specific intervals, and torepay the principal amount of the load at maturity.

Bookrunner Lead manager who is responsible for keeping the order book fororders to purchase the bonds.

Closing Phase shortly before settlement, where all conditions precedentswere collected and payments for the funds arranged.

CollateralisedBond Obligation

An investment-grade bond backed by a large, diversified pool ofhigh yield bonds. Usually broken down into tiers with varyingdegrees of risk and varying interest rates.

Collaterised LoanObligation

A debt security backed by a pool of commercial loans.

CommercialPapers

Short-term obligations with maturities ranging from 2 to 364 daysissued by banks, corporations and other borrowers. Suchinstruments are unsecured and usually discounted, althoughsome are interest bearing.

Coupon The periodic interest that bond investors receive throughout thelife of the security. Generally the larger a bond’s coupon the lessits price will change when market interest rates fluctuate.

Coupon rate The percentage which is multiplied by the principal to arrive atthe yearly coupon payment. While many bonds pay interestmore often than annually, coupon rates are given in annualpercentages.

Dealer Firm whose primary business is entering into transactions onboth sides of wholesale financial markets and seeking profits bytaking risks in these markets.

Definitives Physical delivery of bonds.

Domestic Bonds A bond denominated in the currency of the country where it'sissued.

Due Diligence Process of intensive examination of the financial and economicsituation and planning of a company by external experts, mostlybanks, lawyers and auditors.

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EMTN-Programme

An EMTN-Programme provides a documentation frameworkunder which the issuer is able to access the public and privateEuromarkets in a wide range of currencies, maturities andinnovative structures, without providing all documents(prospectus, dealer agreement, fiscal agency agreement) againfor each issue. The EMTN-Programme is listed on one or morestock exchanges and needs to be updated annually.

Eurobonds A bond that denominated in any currency and is issued by aninternational syndicate and offered to investors in a number ofcountries at the same time.

Floating rate bond A type of bond where the coupon changes periodically based onsome predetermined benchmark such as the spread above theyield on a six-month Treasury security.

Global Bond A bond issued and traded outside the country whose currency itis denominated in, and outside the regulations of a singlecountry; usually a bond issued by a non-European company forsale in Europe or vice versa.

High Yield High Yield bonds are issued by lower-rated corporations,sovereign countries and other entities rated Ba or BB or belowand offering a higher yield than more creditworthy securities;sometimes known as junk bonds.

Hybrid Capital orBalanced Funds

A mutual fund that buys a combination of common stock,preferred stock, bond, short term bonds, to provide both incomeand capital appreciation while avoiding excessive risk. Thepurpose of balanced funds (also sometimes called hybrid funds)is to provide investors with a single mutual fund that combinesboth growth and income objectives, by investing in both stocks(for growth) and bonds (for income). Such diversified holdingsensure that these funds will manage downturns in the stockmarket without too much of a loss; the flip side, of course, is thatbalanced funds will usually increase less than an all-stock fundduring a bull market.

Issuer A government, corporation, municipality or agency who issues asecurity in order to raise capital.

Junk Bonds (seealso high yield)

A high-risk, non-investment-grade bond with a low credit-rating,usually BB or lower; as a consequence, it usually has a highyield.

Kangaroos Slang for Australian securities or issued in Australian Dollar.

Maturity 1. The length of time until the principal amount of a bond must be repaid.

2. The end of the life of a security.Maturity Date The date on which a bond's principal or other liability investment

is repaid to the investor and interest payments stop.

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Medium TermNote

A debt security issued under a program that allows the offeringof notes continuously to investors through an agent (dealer,usually a financial institution). The size and terms of mediumterm notes may be customised to meet investor’s needs.Maturities can range from one to 30 years.

Mortgage-backedSecurities

A security that represents an investment in mortgage loans. Aninvestor owns an undivided interest in a pool of mortgages,which serves as the underlying assets for the security.

Order book A centralised market where prices are determined by an orderexecution algorithm from participants sending firm buy and sellorders.

Over-the-countermarket (OTC)

A securities market that is conducted by dealers throughout thecountry through negotiation of price rather than through the useof an auction system as represented by a stock exchange.

Pfandbriefe In Germany, Pfandbriefe are debt securities, which are used torefinance first-rank loans secured by mortgages or land charges(mortgage Pfandbriefe) or to refinance loans to the public sector(public Pfandbriefe, which were formerly known as communalbonds). They are, in essence, covered debt securities. They canbe issued by private mortgage banks by virtue of the MortgageBank Act, by private ship mortgage banks by virtue of the ShipMortgage Bank Act, and by public sector credit institutions byvirtue of the Public Pfandbrief Act.

Primary Market The primary market consists only of a consortium of financialinstitutions, which initially buys the bonds issued by therespective issuer in order to sell them via their distributionchannels into the secondary market.

Private Placement The negotiated offering of new securities directly to investors,without a public underwriting, usually not listed at a stockexchange.

Prospectus A document that must be provided to investors before they buythe bonds. The prospectus describes the product for sale, theinvesting objectives, past performance, the issuer and hisbusiness, management, potential risks, tax considerations, fees,terms and conditions, selling restrictions and other relevant dataneeded to make an informed investment decision.

Public Placement The negotiated offering of new securities directly to investors,with a public underwriting, usually listed at a stock exchange.

Repo Financial instrument which serves to exchange cash temporarilyfor securities for a predetermined period. Various legalarrangements exist to perform this basic economic function(repurchase agreements, reverse repurchase agreements,sell/buybacks and securities lending). All forms of repos entail achange in ownership.

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RepackagedNotes

Existing bond that is put into another debt structure or new bondin case of a failed repayment of the existing bond or because ofother reasons.

Roadshow A team consisting of originators and officials of the issuer (e.g.Deputy CEO, Finance Director and Group Treasurer) visit themajor financial centres of Europe in order to meet with potentialinvestors to present the issuer and his credit history, his currentbusiness as well as his future plans. The aim is to attract broadinvestor interest for the planned issue and to strengthen thepotential for future issuance.

Samurai A yen denominated bond that is issued in Tokyo but by acompany that is not Japanese.

Secondary Market The secondary market consists of whether professionalinvestors, such as insurance companies or funds, or retailclients, usually private investors. Financial institutions offer thebonds bought in the primary market via their distributionchannels or business relationships into this secondary market.

Settlement Completion of a transaction by exchange of instruments andfunds.

Spread The terms spread refers to the differential between the buyingand the selling price. Latent factors which influence the size ofthe spread include transaction costs, hedges against pricefluctuations and an adverse selection component. The latterfactor offers protection for the party setting the price from hispotential counterparty, giving different levels of information.

Straight Debt Straight debt means plain vanilla structures as a fixed or floatingrate coupon and an average maturity.

Structured Credit /Debt

A bond is called structured if the coupon is linked to an index oroffers options that are normally not covered with a straight bond.

SubordinatedNotes

Securities with a promise to pay that cannot legally be fulfilleduntil payments on certain other obligations have been made.

Subordinated debt Debt that is either unsecured or has a lower priority than that ofanother debt claim on the same asset or property.

Swap Swaps present a financing technique in which two partiesexchange interest rates or currency positions. Examples hereare the swapping of fixed euro interest rates or floating eurointerest rates (“interest rate swap”) or amounts in US dollars foreuro amounts (“currency swap”). Depending on whether suchtransactions affect the assets or liabilities side of the balancesheet, they are called asset or liability swap.

Yankee Dollar-denominated bond issued in the U.S. by foreigncorporations, banks and governments.

Yield The annual percentage rate of return earned on a security. Yieldis a function of a security’s purchase price and coupon interestrate.

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Appendix B: Indicative Time Table for a Eurobond

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