A lot of factors have to come together for a bond to get to market, and while each deal has it own nuances, the overall structure for issuing a corporate bond is typically the same.
Let’s break it down.
New bond issues
For a new issue, the process starts with a conversation – or rather, many conversations, about the state of the market, the company’s goals and what’s possible.
That conversation may be initiated by the company itself, which would approach a bank it has an existing relationship with and say it wants to (raise money to finance various activities which adds value to shareholders) a buyback or to act on a strategic opportunity.
An investment dealer that already covers that company may also pitch executives on the value of the deal, if the pricing is right and the market is showing enough interest to make the dealer believe there’s an opportunity to raise cash at a good price.
Once the company and its bankers agree to go ahead with a deal, the bond desk gets involved.
The banker will typically call people on the bank’s bond desk and ask whether these dealers would be able to place those bonds with their clients, and at what price. The debt capital markets team will canvas clients, working to gather enough interest to put a deal together.
The pricing of the deal is key, and will be determined by looking at the spread, which is a function of both the rating of the issuer and the ranking of the bond in bankruptcy. The company will also need a credit rating, if it doesn’t already have one.
A bank can either underwrite the deal or it can act as an agent. By underwriting the deal the bank takes on more liability – it’s on the hook for any unsold shares of the issue. If it’s acting like an agent, a bank is basically just promising to make its best effort to sell up to a certain amount of the issue, without taking a risk and putting it on a balance sheet.
There will be some regulatory disclosure involved, mainly through a bond indenture that gets distributed to investors, and provides information about that bond.
One of the most important pieces of information to look for in that document is where you rank in the bankruptcy process, which will help determine the yield, or the interest rate. You also want to look at the coupon and the maturity.
If the issuer isn’t as well known or has new information, dealers will then have to market it to investors through what’s known as a “roadshow.”
During the roadshow, the dealers will visit potential investors across the country to talk about the company’s prospects. The different institutions will then decide whether they want to participate in the deal or not.
The dealers will get indications of interest at this point, and put together a list of people willing to buy the securities within a certain price range – this is what’s known as “the book.”
As they get closer to the actual issue, the dealers will price the securities and go back to all the institutional investors who said they were interested to confirm that’s still the case.
If the issue oversubscribed, the company will either issue more securities or the demand will be pro-rated – which means investors will only get 80 or 90 per cent of what they wanted to buy.
Once the bonds are priced on the primary market, they can continue to trade in the secondary market – especially if there was a lot of interest. The investors who didn’t get their full order can then try to buy additional bonds, likely at a higher price.
New vs. frequent issuer
New issues can take between three and five months. That’s because in those cases, as discussed above, a lead investment bank would have to be hired, spend a lot of time getting information on the issuer, get a credit rating and then, with the help of dealers, approach investors.
For companies that are well-known or frequent issuers, the process is much quicker.
A company like Bell Canada, for instance, is already covered by most dealers and has its paperwork in order, so it could do a bond deal in very short order.
A dealer could call them up and suggest an issue, and if Bell agrees, its underwriting group would get to work calling institutional investors and get the deal done in just a few hours.
Who are the key players – and why do they “syndicate?”
For corporate bond deals, the issuers are typically corporations, while the buyers are institutional investors like life insurance companies and pension funds, hedge funds or large fund managers.
The dealers and investment bankers are the ones that facilitate the transaction and “make” the market.
With big deals, banks seldom act alone. They are part of a selling group, which will be made up of a lead underwriter and other banks that act as co-leads. Creating that syndicate means the banks will have access to a bigger potential client base, since each bank will solicit interest from its own clients to sell the securities.
In a traditional debt syndicate, there would be leads and then there would be co-managers as well. The lead helps to structure and document the transaction, design it and introduce the transaction to the market. He or she will also engage the investors and then price the transaction. The “lead of leads” is usually called “top left.”
The co-managers role is usually to support the transaction in any way they can, but they’re not really “doing the deal.” They participate in a more passive way. These co-leads are called “top right.”
The debt syndicate as a whole will be in charge of launching the deal, deciding which investors to approach and what message they want to give to the market when it comes to size, structure, price, term.
It’s also up to the dealers to introduce, launch and execute the deal: they price it and get the bonds delivered into the hands of the investors.