societè generale guest lecture

Question 1

what are the pros of issuing a bond?

Answer 1

1)bonds are liquid and traded
2) they diversify the sources of debt for the firm away from banking market
3) they have longer maturities
4) they help relation banks as they free up capital for them

Question 2

what are common types of bonds?

Answer 2

-plain
-hybrid
-ESG bond
-fixed rate(long maturity usual)
-floating rate (short maturity)
-index linked
-convertibles

Question 3

what’s the role of IBs in the bond market

Answer 3

they are market makers, help sell the proposed bond (underwriting service)

Question 4

what are characteristics size and maturity of bond issue?

Answer 4

-minimal 300M to ensure liquidity usually from 300M to 1B, larger sizes achieved through multi tranche issues
-maturity usually 5-7-10 years, however recently a 15-20-30 year maturity segment spawned. floating rate gives access to shorter maturity 2-5 years.

Question 5

the __________ are different for different grade bonds

Answer 5

buyers

Question 6

what are main pricing drivers for bonds?

Answer 6

-credit rating
-comparable bonds (usually same issuer unless this is the first offering)
-demand and supply in the sector’s bond market at the time of issue
-event risk and external factors (inflation, geopolitical considerations)
-regulatory considerations (especially for restricted issuers)
-new issue premium (to incentivize investors to switch to a new bond)

Question 7

what are structural considerations that affect the price?

Answer 7

-size of the issue
-maturity (for example longer maturity have lower demand and need a lower price)
-covenants
-subordination
-coupon step-ups (if the issuer achieves a given kpi the coupon can step up/ down)

Question 8

what are the convention measures used to price credit?

Answer 8

spread over the government curve and spread over the interest rate swap curve. both measured in basis points.

Question 9

if i only could look at 1 number to price a new bond issue, which one would it be?

Answer 9

the mid swap spread for a comparable bond as it incorporates all of the necessary info.

Question 10

what is the syndicate desk

Answer 10

Syndicate is the interface between the primary and secondary market
By interacting with the sell-side (origination) and the buy-side (sales) , Syndicate can ensure that the demand and supply of capital markets products are matched.

Question 11

what are execution strategies for bond issue?

Answer 11

• best effort strategy: commitment to oversee the issue but no guarantee offered (common for quality paper, lower fees)
  -backstop: the issuer sets a maximum level of cost, if the bond is priced lower than the set threshold the bank suffers the losses (rarer), however extraordinary gains are retained by the issuer.
  -classic underwriting (rare in bond issuance)

Question 12

what are the steps in the issue?

Answer 12

-bank is awarded mandate
-deal/non-deal roadshow: the issuer meets potential investors and markets the bond issued or his position in general
-syndicate calls usually happen daily, the issuer calls syndicate desks to understand market conditions. Recommendations should be made on each call anticipating possible windows for issuance
-if syndicate confirms market conditions are ideal there is a soft sounding process (optional)
-if the process confirms the existence of positive window with healthy investor feedback the deal should be announced as soon as possible
-offers are gathered in the book and the bond is priced.
to note: FLEXIBILITY IS KEY AND THE ISSUER SHOULD POSITION ITSELF TO MOVE FAST IN THESE VOLATILE MARKETS IN
ORDER TO MINIMISE EXECUTION RISK

Question 13

what is spread guidance?

Answer 13

after gathering initial subscriptions, if the issue is oversubscribed the bank revises the spread downwards through a guidance announcement in order to reduce them down to the target issue value.

Question 14

is size of the issue actually declared at announcement?

Answer 14

no, issuer takes freedom to adjust based on market conditions and price when books are closed.

Question 15

is type of order related to type of investor? which type of investor is more desireable?

Answer 15

yes, asset managers vs hedge funds place conservative vs inflated orders. Moreover, investor that buy and hold are preferable to avoid bond price falling in the days following the issue.

Question 16

what is EMTN?

Answer 16

EURO MEDIUM TERM NOTE program is a legal documentation platform that allows issuers to sell bonds on a regular basis without revising documents. This allows issuers to be flexible and act fast on the market as preparing docs usually takes up to 6 weeks.

setting up an EMTN program requires
-prospectus
-underwriting commitment
-comfort letter
-legal opinion
(also GMTN programs exist that allows issues in the US but must conform to SEC rules)

Question 17

HOW ARE COUPONS SET?

Answer 17

usually 0.125% lower than the negotiated yield as the standard is to sell bonds at a discount.

Question 18

trends in the bond market

Answer 18

In 2024, also thanks to decreasing interest rates, the Euro-denominated supply reached significant levels, exceeding 2021 volumes and only below the
record-breaking year of Covid-19
January 2025 showed a solid start to the year on the primary market, with the IG space as the most active sector

Question 19

advantages of issuing a syndicated loan?

Answer 19

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

Question 20

advantages of issuing an ABS

Answer 20

◼ Favourable accounting
treatment
◼ It might be less competitive
than other sources of financing
◼ Alternative source of funding

Question 21

which are the 5 types of issuer?

Answer 21

pubic corporations
governments and sovereign
municipalities
companies
financial institutions

Question 22

which are the types of client? why do they invest in bond markets?

Answer 22

Banks: yield ALM relationship
◼ Central Banks: reserve management
◼ Asset Managers: asset allocation and yield
◼ Insurance Companies: ALM
◼ Pension Funds: yield ALM
◼ Hedge Funds: arbitrage/ long short
◼ Money Market Funds: low risk-yield
◼ Retail: savings managment

Question 23

what are CRAs?

Answer 23

Credit ratings provide an opinion on the relative ability of an entity to meet its financial commitments. Investors use credit ratings as indication of the likelihood of receiving their money back in accordance with the terms on which they
invested. credit ratings are of a prime importance when investors/lenders make an investment decision.An adequate rating significantly increases the company’s visibility, its access to capital markets and reduces its funding cost
without impairing its capacity to implement its strategy

Question 24

what methodologies do CRAs employ to rate an issue?

Answer 24

The rating methodology combines perception of business profile and financial profile over a 3-to 5-year perspective
-BUSINESS PROFILE: considers industry risk and idiosyncratic risk
-FINANCIAL PROFILE: considers financial risk and the company’s strategy.
–> corporate credit worthiness and company credit rating–> Issuance credit rating (taking into account covenants, seniority and guarantees)

Question 25

what's the role of the syndicate once a deal is announced?

Answer 25

-Syndicate, Sales and Origination work together to support investors’ analysis of the issue via the: Organisation of extensive deal and non-deal roadshows involving ⚫ Group presentations ⚫ One-to-ones investor meetings ⚫ Investor conference calls -Sales, split by region, work closely with Syndicate to ensure investor concerns are addressed -During the book-building process, Syndicate collects all orders from investors. Once the book is closed, with the agreement of the issuer, Syndicate will allocate, launch and price the deal

Question 26

what are the necessary considerations to make when forming the syndicate? (awarding underwriting positions)

Answer 26

- sector, type of issuer, deal type and size. -distribution capabilities to target key markets for placement -Strong secondary market trading capacities to provide liquidity assurances to investors Co-leads can be appointed to: -approach a specific segment of the investor base (i.e. niche investors -reward relationship banks

Question 27

what is bookbuilding?

Answer 27

most widely used syndication method as it allows to create the momentum and obtain, at the best conditions for placement. works on a Pot System where all orders are collected by bookrunners allowing them to gauge size and price sensitivity in order to fine tune execution strategy.

Question 28

how does the DMC desk make money?

Answer 28

FEES ◼Fees structure is generally composed by (i)a base fee which can be complemented by (ii)an additional discretionary/incentive fee that is confirmed 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. Fees vary depending on the underwriting commitment of each bank involved in the deal.

Question 29

what is the mandate? what does it contain? how is it announced?

Answer 29

The 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, 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 ◼ Announcement of the transaction ● Content: SG CIB recommends not to mention any maturity, size and spread targets at the outset allowing investors to focus on the credit

Question 30

what are the modalities through which issuer meets investor during roadshow? which team members are ideal?

Answer 30

1 on 1 conference calls group presentations CFO,treasurer/treasury staff, and investor relations

Question 31

how do closing and allocation work?

Answer 31

The 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 further orders will be accepted. ◼ The allocation ● Once all orders are confirmed, the lead managers will co-ordinate the allocation of the available bonds. Given that the majority of orders will not be allocated pro-rata, some considerations during the allocation process are: Early commitment to the deal (e.g. those who expressed interest on the roadshow) Investors taking long-term investment decisions vs. short-term trading desks. Diversification of investor type (e.g. bank, fund, retail, etc.) and geographic location

Question 32

how do launch and pricing work?

Answer 32

The Launch ● Once books are closed and the issuer and the book runners agree upon the final spread, the deal will be launched. This entails a public announcement ◼ The Pricing ● Once allocations have been communicated to investors, the lead managers will price the deal. 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 “breaks” at an agreed time after pricing

Question 33

what are the advantages of a ESG related bond?

Answer 33

-PROMOTE COMPANY’S CONTRIBUTION TO SUSTAINABLE DEVELOPMENT AND POSITION ITSELF AS A BEST-IN CLASS IN ITS MARKET -FURTHER DIVERSIFY THE INVESTOR BASE BY APPEALING TONEW INVESTORSAND NEW FUNDS - ACT AS AN INTERNAL CATALYTST FORSUSTAINABILITY

Question 34

types of ESG bonds

Answer 34

sustainability bonds green loans transition bonds sustainability-linked bonds sustainability-linked loans

Question 35

trends in the ESG bond market

Answer 35

-modest increase in volume expected in 2025, the level may have stabilized and has remained similar in the last 4 years (around 20% of total bond issuance are ESG related instruments)