F R E Q U E N T L Y A S K E D Q U E S T I O N S
A B O U T M E D I U M - T E R M N O T E P R O G R A M S
Understanding Medium-Term Note Programs
What are “medium-term note programs”?
Medium-term note (“MTN ”) p rogram s enable com p anies to offer d ebt secu rities on a regu lar and /or continuous basis.
Trad itionally, the secu rities issu ed u nd er these p rogram s have filled the financing gap betw een short-term com m ercial p ap er, w hich has a m atu rity of nine m onths or less, and long-term d ebt, w hich has m atu rities of 30 years or m ore. As com p ared to other form s of d ebt secu rities, MTN s tend to have their ow n typ e of settlem ent p roced u res and m arketing m ethod s, w hich are sim ilar in som e resp ects to those of commercial paper.
Althou gh m ed iu m -term notes typ ically have m atu rities of betw een tw o to five years, they are not requ ired to have m ed iu m term s. In fact, it is common for com p anies to issu e both short-term and long-term securities under an MTN program.
Why would a company have a medium-term note program?
Like a shelf registration statem ent, an MTN p rogram enables a com p any to sell a w id e range of d ebt secu rities w ithou t having to com p lete the SEC’s
registration or review p rocess for each issu ance. See “H ow are MTN p rogram s registered ?” In ad d ition, an MTN p rogram u ses a m aster set of d isclosu re d ocu m ents, agreem ents w ith selling agents or d ealers, and issu ing and p aying agency agreem ents to help m inim ize the new d ocu m entation that is need ed for each offering.
Who develops MTN programs?
H istorically, m any MTN p rogram s w ere d evelop ed by the commercial paper departments of investment banks. Secu rities from these p rogram s w ere offered and sold on a p rincip al or agency basis from a broker-dealer’s trading desk. The programs often were administered by a bank’s sp ecialty grou p rather than throu gh the typ ical relationship bankers.
What types of issuers establish MTN programs?
Are the debt securities in an MTN program ever guaranteed by an entity other than the issuer?
Yes. Particu larly am ong financial institu tion issu ers, it is com m on for an op erating su bsid iary (su ch as a bank su bsid iary of a bank hold ing com p any) to have a higher cred it rating on its ind ebted ness than the p arent corp oration (su ch as a bank hold ing com p any). Accord ingly, m any MTN p rogram s are stru ctu red so that:
the operating subsidiary is the actual issuer of the secu rities, and the p arent hold ing com p any is the guarantor; or
the p arent hold ing com p any is the issu er of the secu rities, and one or m ore op erating subsidiaries are guarantors.
See “When m u st su bsid iary gu arantors be nam ed in a shelf registration statement?” in these FAQs.
What types of offerings are completed using MTN programs?
In light of the convenience offered by shelf registration and MTN programs, issuers use MTN programs:
to effect sm all and m ed iu m -sized offerings of d ebt secu rities to investors that seek sp ecific term s (know n as “reverse inqu iry” trad es) (see “What are “reverse inqu iry” transactions, and how do they impact the MTN market?”);
to effect large synd icated offerings of d ebt secu rities that m ight, in the absence of an MTN program, be offered through a shelf-takedown;
to offer stru ctu red notes, su ch as equ ity-linked, currency-linked , and com m od ity-linked securities; and
to op erate a “retail note p rogram ,” in w hich an issu er offers d ebt secu rities w ith sm all m inim u m denominations to “retail” investors.
What types of securities normally are sold through medium-term note programs??
H istorically, the m ost com m on typ e of secu rity issu ed u nd er an MTN p rogram is a fixed -rate, non-redeemable senior d ebt secu rity. H ow ever, MTN p rogram s typ ically inclu d e other typ es of d ebt secu rities, inclu d ing floating rate, zero cou p on, non-U.S. d enom inated , am ortizing, m u lti-currency, su bord inated , or ind exed secu rities. Com m on reference rates for floating rate secu rities issu ed u nd er MTN p rogram s inclu d e LIBOR, EURIBOR, the p rim e rate, the Treasu ry rate, the fed eral fu nd s rate, and the CMS rate. Most MTN p rogram s are rated “investm ent-grad e” by one or more nationally recognized rating agencies.
Who sets the terms of medium-term notes?
Sim ilar to the com m ercial p ap er m arket, the trad itional m arket for MTN s is investor-d riven. Dealers continu ou sly offer MTN s w ithin a sp ecific m atu rity range, and an investor can negotiate to have the d ealer m eet its p articu lar investm ent need s at a sp ecific m atu rity level. See “What typ es of offerings are completed using MTN programs?”
Investors in MTN secu rities m ake their investm ent decisions based upon credit ratings, an evaluation of the issu er and its bu siness, the m atu rity of the notes, and the yield on the notes.
Are medium-term notes sold on a firm commitment basis or a best efforts basis?
It varies. The d ealer’s trad itional obligation is to sell the MTN secu rities on a “best efforts” basis. H ow ever, on occasion, com p etitive p ressu res resu lt in a d ealer p u rchasing MTN secu rities as p rincip al. In ad d ition, large synd icated MTN offerings often are effected on a firm com m itm ent basis. In both cases, the MTN d ealer is u su ally regard ed as an “u nd erw riter” for Section 11 purposes.
How are MTNs “posted” and sold?
Throu gh its selling agents, an issu er of MTN s “p osts” offering rates over a range of p ossible m atu rities: for exam p le, nine m onths to one year, one year to eighteen m onths, eighteen m onths to tw o years, and annu ally thereafter. An issu er m ay p ost rates as a yield sp read over Treasu ry secu rities having the sam e m atu rity. The selling agents p rovid e this rate inform ation to their investor clients and to regional dealers.
Issu ers are likely to low er their p osted ratesonce they raise the d esired am ou nt of fu nd s at a given m atu rity. In ad d ition, issu ers w ill change their offered rates as m arket cond itions and p revailing interest rates change. Issu ers m ay effectively w ithd raw from the m arket by su sp end ing sales or, alternatively, by p osting narrow offering sp read s over the com p arable Treasu ry yield s at all of the posted maturity ranges.
When an investor exp resses interest in an MTN offering, the selling agent contacts the issu er to obtain a confirm ation of the term s of the transaction. Within a range, the investor m ay have the op tion of selecting the actu al m atu rity of the notes, su bject to final agreem ent by the issuer.
What are “reverse inquiry” transactions, and how do they impact the MTN market?
Investors often play an active role in the MTN m arket through the “reverse inquiry” process. An investor may seek an investm ent in a sp ecified p rincip al am ou nt, w ith a sp ecified cred it rating, and a sp ecified m atu rity. If a secu rity w ith the d esired term s is not available in the corp orate bond m arket, the investor m ay be able to obtain it in the MTN market through reverse inquiry. In this case, the investor w ill com m u nicate the term s of the investm ent it is seeking to an issu er of MTN s throu gh the issu er’s selling agent.
If the issu er find s the term s of the reverse inqu iry accep table, it m ay agree to the transaction even if it was not posting rates at the desired maturity.
Reverse inqu iry transactions p lay an im p ortant role in both “p lain vanilla” d ebt issu ed in MTN program s and more exotic structured securities.
What is a “retail MTN” program?
H istorically, som e issu ers w ou ld not issu e MTN s excep t in fairly significant p rincip al am ou nts, as bookkeep ing and ad m inistrative costs can becom e d isp rop ortionately burdensome w ith sm aller offerings. H ow ever, book-entry clearing throu gh DTC and ad vances in com p u ter bookkeep ing d ecreased the cost of issu ing d ebt secu rities in sm all d enom inations. As a resu lt, a variety of issu ers have registered MTN p rogram s w ith m inim u m d enom inations of $1,000, or even less. Althou gh m ost MTN s are still sold to institu tional investors, red u cing the m inim u m d enom inations has enabled issuers to reach smaller investors.
levels. In ord er to achieve those objectives, the p rocess of issu ing retail MTN s m ay d iffer slightly from the process of selling MTNs to institutions.
In one typ e of retail MTN p rogram , an issu er w ill p ost rates w eekly w ith retail and /or regional brokers. Du ring the w eek that these rates are p osted , the brokerage firm s m arket the secu rities to retail investors, w ho p lace ord ers in the ap p licable m inim u m denominations. At the end of the w eek, the retail and regional brokerage firm s w ill contact the corp orate issu er and ind icate the aggregate am ou nt of ord ers for notes at each m atu rity, and the corp oration w ill issu e one series of notes at each m atu rity. For exam p le, several hu nd red retail investors cou ld p lace ord ers for MTN s w ith m atu rities of tw o and five years, bu t the ad m inistrative costs for the corp orate issu er w ou ld reflect only two issuances from the shelf registration.
Significant U.S. arrangers for retail MTN s inclu d e Incap ital (and its InterN otes p rogram ) and Merrill Lynch.
The Working Group in an MTN Program
What is the role of the arranger of an MTN program? The arranger of an MTN p rogram serves a variety of roles, including:
serving as p rincip al selling agent for the MTN securities;
ad vising the issu er as to p otential financing opportunities in the MTN market;
com m u nicating to the issu er any offers from potential investors to buy MTNs;
ad vising the issu er as to the form and content of the offering d ocu m ents, inclu d ing the typ es of securities to be included;
help ing the issu er d raft the offering d ocu m ents and related program agreements;
negotiating the terms of the agreements on behalf of itself and the other selling agents;
coord inating settlem ent of the MTN secu rities w ith the issu er, the tru stee, and the p aying agent; and
m aking a m arket in the issu ed and ou tstand ing securities issued under the program.
W hat is t he role of t he ot her selling agent s in an MTN program?
The MTN p rogram m ay have selling agents other than the arranger w ho offer the issu er’s secu rities. H aving m u ltip le selling agents encou rages com p etition am ong the selling agents to m arket the issu er’s secu rities, and m ay low er the issu er’s financing costs for secu rities issu ed u nd er the p rogram . In ad d ition, having m ore selling agents qu ote p rices for the MTN secu rities m ay lead to m ore “reverse inqu iry” transactions. See “What are “reverse inqu iry” transactions, and how d o they impact the MTN market?”
How do the selling agents conduct due diligence with respect to an MTN program?
Whether the selling agents are acting on a “best efforts” or “firm com m itm ent basis” in connection w ith a taked ow n, they are su bject to liability as “u nd erw riters” u nd er Section 11 of the Secu rities Act. See “Are medium-term notes sold on a firm com m itm ent basis or a best efforts basis?”
short notice, the selling agents are not likely to be able to initiate and com p lete a fu ll d ue d iligence p rocess at the tim e of each offering. Accord ingly, it is fairly com m on for the selling agents on an active MTN p rogram to cond u ct “ongoing d u e d iligence” w ith resp ect to the issu er, so that their investigation is complete and up-to-date at the time of each takedown.
With resp ect to so-called “legal d u e d iligence,” the issu er u nd er an MTN p rogram w ill often d esignate a law firm , know n as “d esignated u nd erw riters’ cou nsel,” to cond u ct ongoing legal d u e d iligence, and to share its m aterial find ings w ith the relevant selling agents on a p articu lar taked ow n. See “Are u nd erw riters exp ected to p erform the sam e stand ard of d u e d iligence for a shalf offering?” in these FAQs.
What is the role of regional dealers in the MTN market? At one tim e, the m ajor N ew York-based investm ent banks d istribu ted nearly all MTN secu rities to investors. As the m arket m atu red , regional d ealers began to p lay a larger role in selling MTN s. Regional d ealers receive inform ation abou t MTN issu ers’ offering rates from MTN selling agents. In tu rn, the regional d ealers communicate this information to their investor clients.
When an investor bu ys an MTN throu gh a regional d ealer, the d ealer typ ically receives a selling concession from the MTN selling agent. These p lacem ents throu gh regional d ealers im p rove efficiency in the m arket by broadening the potential investor base for MTNs.
What is the role of the trustee or paying agent in an MTN program?
The tru stee or p aying agent in an MTN p rogram serves a variety of roles, including:
p rocessing p aym ents of interest, p rincip al, and other amounts on the securities from the issuer to the investors;
com m u nicating notices from the issu er to the investors;
coord inating settlem ent of the MTN secu rities with the issuer and the selling agent;
assigning secu rity id entification cod es to the MTN secu rities (in the case of U.S. p rogram s, the tru stee typ ically obtains a block of CUSIP nu m bers for the relevant issu er’s p rogram and assigns them on an issue-by-issue basis);
processing certain tax forms that may be required under the program; and
in the case of a tru stee of a series of U.S.-registered notes, acting as rep resentative of the investors in the event of any claim for p aym ent if a default occurs.
Registration of Medium-Term Note Programs / Offering Documents
How are MTN programs registered?
MTN p rogram s typ ically are registered on a shelf registration statement under Rule 415.
basis. Accord ingly, MTN p rogram s generally are lim ited to larger p u blic com p anies, w ith at least a $75 m illion p u blic equ ity float. See “What is ‘p rim arily eligible’?” in these FAQs.
Com p anies can register MTN p rogram s on Form S-1 or Form F-1. H ow ever, this is rarely d one d u e to the p otential need to u p d ate the MTN registration statem ent to reflect d evelop m ents in the issu er’s bu siness and finances. See “What are the benefits of shelf registration statements?” in these FAQs.
Are MTN programs always registered with the SEC? N o. Som e MTN s are offered in bank note p rogram s exem p t from registration u nd er Section 3(a)(2) of the Secu rities Act of 1933, or in Ru le 144A p rogram s in w hich the secu rities are offered exclu sively to qu alified institu tional bu yers. In the p ast, som e issu ers op erated p rogram s that w ere cond u cted as p rivate p lacem ents in continu ou s Section 4(2) p rogram s. In ad d ition, issu ers m ay establish Regu lation S p rogram s in w hich the secu rities are offered ou tsid e the United States, su ch as in the case of Eu rop ean Med iu m-Term N ote Program s (“EMTN s”), Global Med iu m-Term N ote Program s (“GMTN s”), or Au stralian Med iu m-Term N ote Program s (“AMTN s”). Tw o or m ore of these typ es of p rogram s m ay be com bined , su ch as an EMTN p rogram that also p rovid es for the issu ance of secu rities to qu alified institu tional bu yers in the United States u nd er Rule 144A.
Non-U.S. issu ers that w ish to access the d ebt m arkets in the United States w ithou t registering u nd er the Secu rities Act often establish a Ru le 144A p rogram and/or a Section 3(a)(2) program (if they are banks).
Typ ically, the offering circu lar and settlem ent p rocess for non-registered MTN programs are somewhat similar
to registered MTN s. The p rim ary d ifference is the nature of the offerees.
What offering documents are used in an MTN program?
The issuer’s registration statement for an MTN program
typically consists of:
a “universal” shelf registration statement for debt and other securities; or
a shelf registration statem ent p rovid ing only for debt securities; or
a p rosp ectu s p ertaining to the MTN p rogram itself.
In the first tw o cases, after its registration statem ent becom es effective (or u p on filing, in the caseof a w ell-know n seasoned issu er, or “WKSI,” filing an automatically-effective shelf registration statem ent), the issu er w ill p rep are and file an “MTN p rosp ectu s su p p lem ent” u nd er Ru le 424(b) that d escribes the secu rities to be issu ed u nd er the MTN p rogram and provides the names of the selling agents. See “What is a p rosp ectu s su p p lem ent?” in these FAQs. Trad itionally, the p rosp ectu s su p p lem ent sets forth the aggregate U.S. d ollar am ou nt of the secu rities that m ay be offered u nd er the p rogram . Many WKSIs no longer p rovid e that am ou nt, becau se a WKSI shelf-registration statem ent is not requ ired to sp ecify the aggregate am ou nt of secu rities that w ill be issu ed . See “What are the benefits of qu alifying as a w ell-know n seasoned issuer?” in these FAQs.
of com p lex stru ctu red secu rities offered from an MTN p rogram . See “What is d isclosed in a “p ricing supplement” for a MTN offering?”
Since the SEC ad op ted Ru le 159 in Decem ber 2005, m any issu ers have attem p ted to d escribe as m any of the p otential term s of the secu rities as p ossible in the base p rosp ectu s or the MTN p rosp ectu s su p p lem ent rather than in the pricing supplement. This disclosure strategy enables issu ers to lim it the inform ation that need s to be p rovid ed to an investor at the tim e of p ricing or in the p ricing su p p lem ent. Su ch issu ers are attem p ting to red u ce the likelihood that an investor can claim that the inform ation it received p rior to its agreem ent to p u rchase the secu rities w as inad equ ate w ithou t the information in the pricing supplement.
Und er SEC Ru le 424(c), the base p rosp ectu s and the MTN p rosp ectu s su p p lem ent need not be re-filed w ith the SEC via EDGAR at the tim e of a p ricing w ith the ap p licable p ricing su p p lem ent if those tw o d ocu m ents have not changed since their p reviou s filing. H ow ever, som e issu ers choose to re-file those d ocu m ents together w ith the p ricing su p p lem ent in ord er to p rovid e investors m ore convenient access to all of the relevant disclosure.
What other offering documents may be used in an MTN offering?
In ad d ition to the base p rosp ectu s, MTN p rosp ectu s su p p lem ent, and p ricing su p p lem ent, an issu er and the selling agent m ay u se several other d isclosu re documents in the offering process:
Preliminary and Final Term Sheets: su bject to the
filing requ irem ents of Ru le 433 and other SEC ru les relating to “free w riting p rosp ectu ses,” an issu er or a selling agent m ay u se p relim inary and
final term sheets to negotiate the term s of an offering w ith p otential investors, to broad ly m arket an offering, or to set forth the agreed -u p on final term s of an offering. As p er the d iscu ssion of Ru le 159 above, p rovid ing a final term sheet at the tim e of p ricing also m ay help bolster the p osition that the investor received all of the relevant requ ired inform ation at the tim e it entered into its agreem ent to p u rchase the secu rities. See “What offering d ocu m ents are used in an MTN program?”
Free W riting Prospectuses: issu ers and selling
agents m ay u se brochu res, p am p hlets, w ebsites, and other types of documents to market potential offerings from an MTN program.
Product Supplements: issu ers of stru ctu red p rod u cts from MTN p rogram s often u se a “p rod u ct su p p lem ent” to d escribe the d etailed term s, risk factors, and tax consequ ences of a particular type of product to potential investors.
Underlying Supplements: som e issu ers of stru ctu red p rod u cts from MTN p rogram s u se an “u nd erlying su p p lem ent” to d escribe one or m ore equ ity or com m od ity ind ices that w ill be linked to the relevant security.
How do the offering documents differ for a non-registered MTN program offered in the United States? Becau se Ru le 144A and Section 3(a)(2) p rogram s are not su bject to the SEC’s registration requ irem ents, these p rogram s d o not involve the filing of a registration statem ent. Instead , the p rincip al d ocu m ent u sed to d escribe the secu rities and the issu er is an “offering m em orand u m ,” w hich m ay be called an “offering circu lar.” In ad d ition to a d etailed “d escrip tion of the secu rities” section, an offering m em orand u m w ill either inclu d e a d escrip tion of the issu er’s bu siness and financial statem ents, or incorp orate them by reference from the issu er’s p u blicly-available d ocu m ents in the United States or its home jurisdiction.
In ad d ition, the issu er and the selling agents for these offerings m ay u se a variety of term sheets to offer these secu rities, w hich are not su bject to the filing requirements of Rule 433.
What additional exhibits are required in the registration statement for an MTN program?
If not otherwise filed with the registration statement, the issuer under an MTN program must also file:
the d istribu tion agreem ent w ith the selling agents;
the ind entu re (or ind entu res) w ith the ind entu re trustee;
an Exhibit 5.1 op inion as to the legality of the notes to be issued under the program;
in the case of com p lex secu rities, an Exhibit 8.1 op inion as to the d isclosu re of the U.S. fed eral income taxes; and
the form of the note or certificate representing the medium-term notes.
Issuers often file these documents as to the program as a w hole at the tim e the MTN p rosp ectu s su p p lem ent is filed . H ow ever, d ep end ing u p on the circu m stances and the term s of the relevant offering, these d ocu m ents m ay be filed at the tim e of a sp ecific take-d ow n. See “Is a legality op inion requ ired to be p re-effectively filed for a shelf registration statem ent relating to a d elayed offering?” in these FAQs.
Establishing a Medium-Term Note Program
What documents are used to establish an MTN program?
In ad d ition to the d isclosu re d ocu m ents (see “Registration of Med iu m-Term N ote Program s – Offering Docu m ents”), the follow ing d ocu m ents are typically used to establish an MTN program:
one or m ore ind entu res w ith the ind entu re tru stee (in the case of an SEC-registered p rogram ), or p aying agency agreem ents w ith the p aying agent (in the case of an u nregistered program);
a d istribu tion agreem ent (or “p rogram agreem ent”) betw een the issu er and the selling agents or dealers; and
Ad d itional agreem ents for an MTN p rogram m ay include:
Calculation A gency A greement: u nd er this agreem ent, the calcu lation agent, w hich often is the tru stee or the p aying agent, agrees to calcu late the rate of interest d u e on floating rate notes. This typ e of agreem ent also m ay be u sed in connection w ith stru ctu red notes to calcu late the retu rns p ayable on the note. In the case of stru ctu red notes, a broker-d ealer (u su ally, the arranger or one of its affiliates) is m ore likely to serve as calculation agent.
Currency Exchange Rate A gency A greement:u nd er this agreem ent, an exchange rate agent (again, often the tru stee or the p aying agent) converts the p aym ents m ad e by the issu er on foreign currency-d enom inated MTN notes into U.S. dollars for the benefit of U.S. investors.
In ad d ition, at the tim e an MTN p rogram is established , the issu er generally is requ ired to fu rnish a variety of d ocu m ents to the selling agents, as w ou ld be the case in a typical underwritten offering:
officer certificates as to the accu racy of the disclosure documents;
legal op inions as to the au thorization of the p rogram , the absence of m isstatem ents in the offering documents, and similar matters; and
a com fort letter from the issu er’s ind ep end ent auditors.
Dep end ing u p on the arrangem ents betw een the issu er and the selling agents, som e or all of these d ocu m ents w ill be requ ired to be d elivered to the selling agents on a qu arterly basis as p art of the selling agents’ ongoing
d u e d iligence p rocess. See “H ow d o the selling agents cond u ct d u e d iligence w ith resp ect to an MTN p rogram ?” Som e or all of these d ocu m ents also m ay be requ ired in connection w ith certain taked ow ns, su ch as large syndicated offerings.
What types of provisions are in the distribution agreement for an MTN program??
A d istribu tion agreem ent (w hich m ay be called a “p rogram agreem ent” or a “sales agency agreem ent”) is sim ilar to an u nd erw riting agreem ent in m any w ays, bu t is d esigned to p rovid e for m u ltip le offerings d u ring the life of the program. Typical contents include:
representations and w arranties of the issu er as to the accu racy of the offering d ocu m ents, the authorization of the program, and other matters;
the step s to be follow ed if the MTN p rosp ectu s su p p lem ent is am end ed or the size of the program is increased;
the step s to be follow ed , and the ap p rovals requ ired , if any free w riting p rosp ectu ses are to be used;
requ irem ents as to the cond itions p reced ent, d ocu m ents, and d eliverables for establishing the program and/or conducting takedowns;
requ irem ents as to any subsequ ent d eliverables from the issu er to the selling agents, su ch as p eriod ic com fort op inions, legal op inions, and officer certificates;
p rovisions allocating p rogram exp enses am ong the issuer and the selling agents;
p rovisions relating to the d eterm ination of the selling agents’ com p ensation, or a sched u le of commissions; and
p rovisions for ad d ing ad d itional selling agents, w hether for the d u ration of the p rogram or for a specific offering.
The rep resentations and w arranties u nd er the d istribu tion agreem ent typ ically are d eem ed to be m ad e both at the tim e of the signing of the agreem ent and at the time of each takedown.
What kind of bond indenture is used for an MTN program?
In the case of a registered p rogram , the ind entu re or ind entu res for an MTN p rogram m u st be qu alified u nd er the Tru st Ind entu re Act of 1939. The ind entu re m ay or m ay not be d esigned for sp ecific u se w ith an MTN p rogram . The ind entu re is u su ally open-ended, and does not limit the amount of debt securities that can be issu ed . See “When shou ld an ind entu re be qu alified u nd er the Tru st Ind entu re Act in connection w ith a delayed offering of debt securities?” in these FAQs.
The ind entu re m ay have restrictive covenants, affirm ative covenants, and events of d efau lt that vary depending upon the nature of the issuer.
What forms of notes are used for an offering under an MTN program?
The notes issu ed u nd er an MTN p rogram typ ically are in global form , w ith a single m aster certificate representing each series. In U.S. programs, an investor’s interest in the global note is held throu gh a d irect or indirect participant in the DTC system.
In a typical U.S. offering of debt securities that does not involve an MTN p rogram , the form of note u sed to
rep resent the secu rities is cu stom ized sp ecifically for that offering. H ow ever, in the case of an MTN offering, it m ay be an u nnecessary cost to create a cu stom ized form of note for each offering. Accord ingly, an MTN p rogram often w ill involve one or m ore form s of notes that consist of two key parts:
d etailed p rovisions that cou ld ap p ly to m any d ifferent typ es of notes (fixed and floating; the calculation of different types of base rates); and
a short lead ing p age or cover p age for the note that ind icates (throu gh “check boxes” and blank lines) w hich of those d etailed term s are applicable to the specific issuance.
Althou gh notes of this kind m ay be rather lengthy, this form u lation enables the issu er and /or the trustee to create the form s of notes for actu al take-d ow ns m ore efficiently. Of cou rse, in the case of m ore com p lex secu rities, su ch as stru ctu red notes, m ore cu stom ized forms of global notes often must be created.
Are MTN programs rated by rating agencies?
The issu er’s cred it rating p lays an im p ortant p art of an investor’s d ecision to p u rchase MTN s. Accord ingly, an issu er of MTN s u su ally w ill have either cred it ratings for its ind ebted ness generally, or cred it ratings that are sp ecific to the MTN p rogram . Most MTN p rogram s carry an investm ent grad e rating. The issu er w ill d eliver cop ies of the ap p licable ratings letters to the arranger, and generally is requ ired to inform the selling agents of any changes in its ratings.
Effecting an MTN Offering
How complicated is a takedown for a MTN program? A taked ow n from an MTN p rogram can be very sim p le. Each taked ow n only requ ires a few m atters to be addressed, including:
agreeing u p on the term s of the taked ow n (frequ ently d one orally, w ith w ritten confirmation);
in certain cases, su ch as a large synd icated taked ow n from an MTN p rogram , d elivering an u p d ated com fort letter, legal op inions, and officers’ certificate to the selling agents;
d elivering the base p rosp ectu s, MTN p rosp ectu s su p p lem ent, and p ricing su p p lem ent to investors (w hich m ay occu r via “access equ als d elivery” under SEC Rule 172);
com p leting a note, either in global or certificated form , w hich is d one by the tru stee or issu ing and p aying agent u p on the issu er’s instru ctions (see “What form s of notes are u sed for an offering under an MTN program?”; and
filing a p ricing su p p lem ent u nd er Ru le 424 w ith the SEC.
What is disclosed in a “pricing supplement” for a MTN offering?
For a sim p le d ebt secu rity, very little inform ation is requ ired in the p ricing su p p lem ent. The p ricing su p p lem ent w ill inclu d e the final term s of the offering, such as:
the title of the securities;
the issue date;
the maturity date;
the interest rate;
the redemption dates, if any;
the underwriter or selling agent; and
the selling agents’ compensation for the offering.
How do MTN securities settle and clear?
MTN offerings settle and clear in the United States throu gh the issu ance of secu rities in global form . Beneficial interests in these global notes are held by direct and ind irect p articip ants of The Dep ository Tru st Com p any (“DTC”). When an MTN is issu ed u nd er the book-entry system , an agent bank for the issu er u ses a com p u ter link w ith DTC to enter the d escrip tive inform ation and settlem ent d etails of the offering. The selling agent receives a cop y of the com p u ter record from DTC, and the investor receives a trad e confirm ation from the selling agent and p eriod ic ownership statements.
Second ary m arket trad es also are record ed w ith com p u ter entries. Und er the book-entry system , an issu er of MTN s, throu gh the tru stee or p aying agent, m akes a single w ire transfer to DTC that covers all interest p aym ents on each interest p aym ent d ate, and only one transfer of funds on the maturity date to DTC.
This system d iffers from a “p ap er certificate” system , in w hich the issu er m u st m ake sep arate p aym ents to each secu rityhold er. In ad d ition to red u cing the cost of secu rities issu ances, the book-entry system red u ces the likelihood of d elayed d elivery becau se of logistical problem s, and red u ces the chances of failed trad es arising from paperwork errors.
Review of MTN Programs by FINRA
Are the arrangements with the selling agents in an MTN program subject to review by FINRA?
It d ep end s. Many MTN p rogram s involve investm ent grade d ebt secu rities issu ed from shelf-registration statem ents by issu ers w ith a p u blic equ ity float of m ore than $300 m illion. These p rogram s are not su bject to review by the Financial Ind u stry Regu latory Au thority, or FIN RA. See “When is a shelf offering exem p t from FIN RA filing u nd er the Corp orate Financing Ru le?” in these FAQs.
© Morrison & Foerster LLP, 2009
H ow ever, in the case of an MTN p rogram op erated by a financial institu tion, in w hich one or m ore of its broker-d ealer affiliates serves as a selling agent, the u nd erw riting arrangem ents m u st be review ed by FINRA under FINRA’s “conflict of interest” rules. Since m any of these issu ers are w ell-know n seasoned issu ers, FIN RA often w ill issu e a “no objections” letter w ith resp ect to the u nd erw riting arrangem ents w ith m inim al or no review.
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By Lloyd S. Harmetz,
