European DCM and the Role of Financial Intermediaries (Societe Generale)

Question 1

Why isse a bond?

Answer 1

1. Secondary market liquidity
2. Diversification of sources of funding
3. Ability to secure long-term financing
4. Free up banks’ capital

Question 2

Why issue a syndicated loan?

Answer 2

1. Typically the most senior in the debt capital structure
2. Cost efficient form of financing when close relationship with banks is maintained
3. Easier to execute than a bond or an ABS issue
4. Available to a wider range of corporates

Question 3

Why issue ABS?

Answer 3

1. Favourable accounting treatment
2. It might be less competitive than other sources of financing
3. Alternative source of funding

Question 4

What is the definition of a bond?

Answer 4

Any interest bearing security that obligates the issuer to pay the bondholder a specific sum of money, usually at specific intervals and to repay the principal amount of the loan at maturity

Question 5

What are 8 specific features of a typical bond?

Answer 5

• The
  issuer
  ● The guarantor
  ● The credit rating of the issue
  ● The maturity date
  ● The coupon
  ● The price, and
  ● The nominal value
  ● ESG-related

Question 6

Who invests in bonds and why?

Answer 6

1. Banks : ALM, Yield, Relationship
2. Central banks: Reserve management
3. Asset managers: Asset allocation, Yield
4. Insurance companies: ALM
5. Pension Funds: Security, ALM
6. Hedge Funds: Rel Val, Arb, Total return
7. Money Market Funds: Low Risk Return
8. Retail: Saving Management

Question 7

What can be achieved in the eurobond market?

Answer 7

Issue size:
● Minimal amount required to ensure liquidity 300 million
●From 300 million up to over 1 billion per tranche in normal market conditions
● Larger sizes achievable through multi tranche, multi currency issues
Maturity
●The 5, 7, & 10 year tenors remain the most sought after tenors on the EUR fixed rate market by investors as the best adapted to their portfolios requirements, although we have seen a very strong demand for shorter tenors
Since the 2000 s, lengthening of the credit curve with the inception of the 15 20 30 year segments
● The Floating Rate Note market gives opportunities in the short term maturities 2 year up to 5 years

Question 8

What are the three leading rating agencies?

Answer 8

Standard and Poor’s (S&P), Moody’s, and Fitch

Question 9

What is the total debt/EBITDA ratio for different bond ratings?

Answer 9

1. For investment grade (AAA/Aaa to BBB-/Baa3) the ratio is from 0.4x to 2.2x.
2. For sub-investment grade (everything below that) 3.5x to 7.9x

Question 10

What are the 6 factors considered by the bankers when issuing price guidance for a new corporate bond?

Answer 10

1. Credit quality
2. Comparables
3. Current and expected supply in the sector and wider market
4. Event risk and external factors
5. Regulatory risk
6. New issue premium

Question 11

What are structural aspects of a new bond issue thtat can affect its price?

Answer 11

1. Size
2. Maturity
3. Covenants
4. Subordination
5. Coupon step-ups

Question 12

What are the two main measures used to price credit?

Answer 12

1. Spread over Swap curve
2. Spread over Government curve

Both measured in basis points

Question 13

What is the spread over the swap curve used for pricing credit?

Answer 13

• A swap is a contract in which two counterparties agree to exchange interest rate flows. The Swap Curve is an array of swap rates for each relevant maturity
• The spread over the Swap Curve is the difference between the yield of the bond we are evaluating and the Swap rate for a specific maturity

Question 14

What is the spread over the Government Bond Curve used for pricing credit?

Answer 14

• The Government Bond Curve is constructed by compiling the outstanding Government on-the-run benchmarks. Prices are found in the major exchanges/markets via Bloomber or Reuters
• The spread over the Government Bond Curve is the difference between the yield of the bond we are evaluating and the yield of the Government Bond for a specific maturity

Question 15

What are some basics to measuring credit spreads?

Answer 15

1. Spread over mid-swap = Bond Yield - Mid-Swap Rate
2. Spread over benchmark = Bond Yield - spread over benchmark
3. Mid-swap rate is higher than benchmark
4. The spread on the bloomger terminal refers to spread over government benchmark
5. The spread over the credit spread is found in I-Sprd field

Question 16

What does the syndicate desk do?

Answer 16

• Syndicate is the interface between the primary and secondary market
• By interacting with Origination (in contact with the sell side) and Sales (in contact with the buy side), Syndicate can ensure that the demand and supply of capital markets products are matched
• During the book building process, Syndicate collates all orders from investors Once the book is closed, with the agreement of the issuer, Syndicate will allocate, launch and price the deal

Question 17

What is the structure of a syndicate

Answer 17

• 90-95% of issue is done/underwritten by the joint-bookrunners
• 5-10% is done/underwritten by the co-lead managers

Question 18

What is the bookbuilding process in bond issuance?

Answer 18

• The book building process is the most frequently used process as it allows to create the momentum and obtain, at the best conditions, the widest and the most diversified placement
• This method works on a Pot System
• In a Pot System all orders ( price and type) are collected by the bookrunners Duplicate orders are eliminated With max transparency in the book, price and size sensitivity can be gauged by the bookrunners in order to fine tune the execution strategy
• Should the amount of orders not be sufficient to cover the targeted size of the bond issue, the final size of the bond can be revised

Question 19

What are the execution strategies for syndication?

Answer 19

1. Best efforts: commitment to oversee but not guarantee the sale of the newly-issued bonds at the best possible conditions within a date agreed with the issuer. It does not imply any commitment on a specific size or on other terms of the issue from the bank’s part. The bank is not liable for delivering a product that bears higher than expected costs for the issuer As the strategy is less risky for the bank, fees are also generally lower.
2. Backstop: sets a maximum level of costs that the issuer is willing to bear The bank commits itself to issue a bond with a coupon not higher than the one agreed with the issuer Should the coupon be higher than the agreed maximum level, the costs are covered by the bank itself vice versa, if the coupon is lower than the expected range, the “ proceeds are retained by the issuer.
3. Underwriting: (almost never used in bond issuance). Issuers tend to choose backstop over underwriting for a simple reason the underwriting process lets banks retain the extraordinary proceeds of the issue eg if the issue bears a lower than expected coupon), whereas backstop pays them to the issuer

Question 20

What is the general process for bond issuance?

Answer 20

1. Complete documentation.
2. Mandate Banks
3. Non-Deal Roadshow
4. Daily syndicate calls
5. Assess market
   * In case of good market conditions go to next step
   * In case of unfavorable market conditions go to previous step
6. Soft-sound the market (again go or no go process)
7. Assess demand
8. Announce transaction
9. Launch and price Eurobond

Question 21

What are the three types of investors for eurobond execution, which also correspond to the order in which they are involved in the process.

Answer 21

1. Investors for soft sounding (used only in select HY transactions)
   * Select group of major credit investors
   * Make or break order sizes
   * Will provide price/volume discovery
2. Momentum Investors
   * Major Asset Managers
   * Relative Value Hedge Funds
   * Insurance Companies
   * Hedge Funds
   * Large order sizes
   * Price sensitive
   * Relative value driven
3. Mainstream Investors
   * Smaller regional credit investors
   * Banks
   * Retail credit funds
   * Liquidity Hedge Funds
   * Small Regional Credit Investors
   * Prop desks
   * Smaller ticket sizes
   * Price insensitive
   * Momentum driven

Question 22

What are the two types of orders you see on the bankbook during bond execution?

Answer 22

1. Limit order: The investor cancels the order if it is below a certain spread
2. Re-offer order: The investor will take whatever price is finalized

Question 23

What is the fee structure in bond issuance?

Answer 23

• Fee structure is generally composed by a base fee which can be complemented by an additioanl discretionary fee that is confrimed to the pool of bookrunners once the transaction is priced
• Fees are paid by the issuer and are a function of the role covered by each bank in the syndicate structure. Fees vary depending on the underwriting commitment amount of each bank involved in the deal.

Question 24

What is the Euro medium-term note program?

Answer 24

It is a legal documentation platform which allows issuers to issue bonds on a regular basis. The program is intended primarily for securities offerings outside the United States, and particularly in Europe Setting up an EMTN Program would bring flexibility and cost efficiency should the Company envisages tapping repeatedly the bond markets.

Question 25

What are the legal documents involved in an EMTN (euro medium-term note) program

Answer 25

1. Prospectus
2. Subscription Agreement
3. Comfort letter
4. Legal opinions

Question 26

What is the GMTN Program (Global Medium Term Note Program)

Answer 26

GMTN is a medium term note program that is designed to allow issuance in both the US domestic MTN market and the euro medium term note market. Such an issuance program must meet Securities and Exchange Commission requirements in the US

Question 27

What is the detailed process of bond issuance?

Answer 27

1. Mandate
   * Once the issuer is comfortable with all terms and conditions proposed by the banks they will mandate one or more financial intermediaries as bookrunners
   * The mandate will usually detail other factors agreed currency, size, tenor, target spread, fees, expenses, announcement timing and syndicate structure. Any change to these factors must be agreed with the issuer once the mandate is awarded.
2. Announcement
   * Content SG CIB recommends not to mention any maturity, size and spread targets at the outset allowing investors to focus on the credit
3. Roadshow
   * Team consists of the CFO, Treasurer, Investor Relations or Group Treasury staff
4. Closing
   * Once sufficient orders have been received, and at a time agreed and announced in advance by the lead-managers, the book will be closed. At this point no fruther orders will be accepted. The sales force will at this stage confirm all orders as firma nad discuss investors’ hedging requirements
5. Allocation
6. Launch
   * Once books are closed and the issuer and the bookrunners agree upon the final spread, the deal will be launched This entails a public announcement (invariably through the International Reuters Insider screen “IIIA”)
7. Pricing
   * Once allocations have been communicated to investors, the lead managers will price the deal in conjunction with relevant swap desks in order to achieve the issuer’s target all in spread. At this stage, the coupon and the Fixed Price re offer (“FPR”) are set
   * Participating underwriters may not sell bonds below the FPR until the deal “ at an agreed time after pricing