Bonds and Ratings

Author: Adam                            Updated: 27/05/2019

1. Bonds

Bonds are long‐term debt securities issued to investors either by a public offering or through a private placement (in both cases with an underwriting process). As anticipated, bonds are long-term debt securities issued to investors either by:

• Public Offering

  • Amount of more than 150 million Euro
  • Audience is not known in advance.
  • Listed:
    • ADVANTAGE: Lower cost / higher liquidity
    • DISADVANTAGE: Costly (even limited) / Requires a prospectus (info-memo)

• Private Offering

  • Amount of from 30 to 150 million Euro
  • less than 50 investors
  • Not listed:
    • ADVANTAGE: Less disclosure
    • DISADVANTAGE: Higher cost / Lower liquidity

Main features of bonds (current trends):

• ISSUE SIZE: Issue size generally ranges from 300mln to 1bn (otherwise there is illiquidity risk).
• MATURITY: 5, 7, and 10‐years maturities are generally the most common, but longer maturities are available.
• INTEREST RATE: The interest rate is usually fixed, and coupons are paid annually or semi‐annually.
• COLLATERALATION: Collateral security and the level of seniority protect bondholders from other creditors in case of default.
• CONVENANT: Debt covenants are included to prevent the company from purposely increasing the value of its default option.

Types of bonds are:

• Straight Bond: It is called straight because it remains “bond” until the end of its life.
• Hybrid Bond: It is a bond that combines both equity and debt features.

Conventional bonds are:

• Fixed rate bonds: In some cases, issuers place floating rate notes with shorter maturity than fixed rate bonds and coupons variable on the base rate.

Other non-conventional types of bonds are:

• Index Linked Notes: are bonds in which the payment of interest is linked to a specific price index – often the Consumer Price Index (Inflation-linked bond).
• Zero Coupon Bonds: are debt securities that do not pay interest but are issued at discount and all interests are paid at maturity together with the principal.
• High-Yield Bonds (HYs) are senior bonds issued by sub-IG companies. They contain a call feature (i.e. issuer can repay the bond after a certain number of years with a predetermined decreasing premium).

Types of hybrid bonds:

• Convertible bonds: include a provision that gives to the bondholder the right, but not the obligation to convert the bond into a predetermined number of ordinary shares of the issuer (conversion ratio).
• Bonds with warrant allow the holder to acquire shares of the issuing company at a specific price and within a specific time frame.

Actors Involved are:

• Global coordinator/s: it is involved from the beginning in the advisory phase. It will manage all the deal making phase spending its reputation in placing the debt.
• Co-Lead Managers: IBs that helps GC to target specific geographic markets and clients. Examples: HSBC in North America; Citi Bank in Latin America.
• Sellers: usually Commercial Banks in charge to target retail investors
• Underwriters: IBs and Commercial Banks signing the obligation to buy bonds

Remuneration Fees

• Global coordinator: 1-1,5% (lower than IPO).
• Co-lead managers: 0.75-1%.
• Sellers: 0,05-0.10%

2. Rating Bonds

Rating assignment is the result of complex analysis of all the risk profiles of the company. Rating process of a bond has four steps:

• rating assignment is not only the ratios of the company, but also the result of complex analysis of all the risk profiles of the company.
• rating assignment evaluates the sustainability of the cash flow
• the rating assignment consistent to the macroeconomy and the industry
• the rating assignment has an industrial prospect of 3-5 years

A publicly disclosed rating could be beneficial for a company since it allows the widening of the investor base and the subsequent reduction of the pricing for the new bond transaction, currently enhanced for IG credit by the inclusion in the ECB purchase program. Here we listed some pros and cons of the public rating:

Pros

• better pricing conditions
• ECB purchase program
• increasement of liquidity
• promote transparency
• increase the number of independment credit analysis and coverage

Cons

• increased disclosure to the market
• rating agencies fees would be expensive
• the flexibility of extraordinary transactions will be reduced

Indicative Schedule For European Roadshows

1. marketing activity
2. credit story
3. apgetitive of investors
4. 1-1 basis
5. roadshow in most important financial centres: Madrid/Amsterdam/London/Paris/Milan/Frankfruit

What to present? (Credit story)

• funding policy
• business model
• financial / accounting perspective
• legal / fiscal

Who should invite to the roadshow?

• senior manager
• funding representative
• investor relators

Timeline of excutiving bonds

• T - 7: Announcement to market
• T - 4 / T - 1: Roadshows
• T - 4 / T: Collection Investors Feedbacks
• T: Launch to the market
  • opening book
  • release the offical spread
  • set the financial price spread
  • final TERRs / book closing
• T + 3: Settlement
• T + 5: Free to trade