IPO of debt security in BD

7/28/2019 IPO of debt security in BD

1/56

Welcome to Our Presentation

Presentation Topic:

Chapter 6: Debt Underwriting

Presented by: Group: 06


2/56

Group: 06

Nazim Reza 16-011

Tauhidul Islam 16-071

Rafsan Mahtab 16-087

Md. Rezaur Rahman 16-040

Md. Nazmush Shakib 16-035


3/56

Government Securities Market

Investment Banks works as Primary Dealers inUS treasury Market.

Huge amount of treasury securities are sold inrecent year to support the deficit.


4/56

Types of Government Securities

1. Treasury Bills

a) Shortterm security (up to 1 year)b) Discounted instrument

c) 4, 13, 26 weeks bill

2. Treasury notes

a. Mediumterm security (semi annual coupon)b. 2, 3, 5, 10 years

c. Current interest rate benchmark

3. Treasury bonds

a. 20 - 30 years bonds (Quarterly coupon)

b. suspended in 2001, reissued in 2006

4. Treasury Inflation Protection Securities (TIPS)

a) Fixed interest rate with inflation adjusted principal.

b) Holder receive adjusted principal amount at maturity.


5/56

Government Securities Market: Continued

U.S. Treasury Securities Outstanding Source: US Treasury

USD Billions

Bills Notes Bonds TIPS2 Total

1996 777.4 2,112.3 555.0 - 3,444.7

1997 715.4 2,106.0 587.3 33.0 3,441.7

1998 691.0 1,960.7 621.2 67.6 3,340.5

1999 737.1 1,784.5 643.7 100.7 3,266.0

2000 646.9 1,557.3 626.5 121.2 2,951.9

2001 811.2 1,413.9 602.3 140.1 2,967.5

2002 888.7 1,580.9 588.5 146.8 3,204.9

2003 928.8 1,905.7 564.2 176.2 3,574.9

2004 1,001.2 2,157.1 539.4 245.9 3,943.6

2005 960.7 2,360.2 516.4 328.6 4,165.9

2006 940.8 2,440.5 530.5 411.1 4,322.9

2007 999.5 2,487.4 558.4 471.4 4,516.7

2008 1,861.2 2,791.5 591.9 529.6 5,774.2

2009 1,793.5 4,181.1 717.9 568.1 7,260.6

2010 1,772.5 5,571.7 892.6 616.1 8,853.0

2011 1,520.5 6,605.1 1,064.1 738.8 9,928.4

2012 1,629.0 7,327.1 1,240.2 849.8 11,046.1

2013 1,607.9 7,386.2 1,253.2 860.9 11,108.2


6/56

Coupon Stripping

STRIPS: Separate Trading of Registered Interestand Principal of Securities.

Also known as Treasury Zero or Treasury Zero

Coupon Coupon paid in Coupon date and Principal Paid

in maturity.

Reconstitution is possible: Needs all coupons andappropriate principal amount.

Reconstitution reflects efficiency through thepossibility of arbitrage.


7/56

reasury n a on- n exeSecurities

Initiated in January, 1997: A 10 year note

5, 10, 20, 30 years of maturity available

Fixed coupon rate but inflation adjusted principal.

Above par principal amount, despite thepossibility of deflation.

Guaranteed real rate of return above inflation.

Flight to quality: Foreign purchase of U. S.

Security, seeking financial stability. Flight to liquidity: Phenomena of buying newer

securities using foreign funds, a run for liquidity.


8/56

Market Quotations

Published in The Wall Street Journal and othernewspapers under the headline of Treasury

bonds, notes and bills

Treasury Strips are quoted in terms of price.Types of strips are indicated as-ci = coupon strip

np = note principal stripbp = bond principal strip


9/56


10/56

Government Securities: PerspectiveBangladesh

Bangladesh Bank issues and trades

i. 30-day BB Bill,

ii. 91-day, 182-day & 364-day T-Billsiii. 5-yr, 10-yr,15-yr & 20-yr Treasury Bonds

Transaction of govt. securities goes online fromDecember 17, 2012


11/56

Government Securities: Perspective Bangladesh (Continued)


12/56

Government Securities: PerspectiveBangladesh (Continued)

Directorate of national savings issues:

a) Bangladesh Sanchayapatra of 5years and 3months maturity.

b) Pensioner and Paribar Sanchayapatra

c) Bangladesh Prize Bond

d) Investment and Primer bond in USD ($)

e) Savings Banks


13/56

Treasury issuing process and auction

The department of treasury sells government

securities at Regular scheduled auctions

Most treasuries brought by the primary

dealers

Individual investors purchase smaller scale

Minimum bid: $1000 and bid excess of $1000

be the multiples of $1000


14/56

Treasury issuing process and auction

Auction process starts with the announcement

(public) by the treasury; included:

Offering amount

Description of amount

Securitys eligibility for STRIPS(separate trading of

registered interest and principal of securities)

Procedures of submitting bids, Maximum bid

amount and payment terms


15/56

The auction process

After the announcement of auction, Bids

accepted up to 30 days before the auction

Submitted electronically via the Treasury

Automated Auction Processing System

(TAAPS), direct website, mail or in person

Two types of bid submitted:

Noncompetitive and

competitive


16/56

Noncompetitive bids:

Submitted by small investors and individuals

The amount of purchase indicated

No indication of price Limit for biding is:

up to $1 million in bill auction and

$5 million in note auction Price is unknown until the auction results are

announced


17/56

Competitive bids

Submitted by primary dealers

Act for their own account or on behalf of

clients

Specifies both the amount and price willing to

pay

Accepted if the bid yields not higher than the

stop yield, otherwise rejected


18/56

Auction process

Dealer prohibited from bidding both competitive

and noncompetitively for its own account in the

same auction

Competitive bidders are permitted to submitmore than one bid

No bidder can not bid for more than 35% of the

total amount of the security being sold A primary dealer submit bids through Treasury

Automated Auction Processing System (TAAPS)


19/56

Auction process

Treasury nets out the total amount of noncompetitivetenders

allocates the balance to competitive bidders with bidsat per below the high yields(stop yields)

The Auction is Single price or Dutch auction (biddersawarded the price results from higher yields)

Tenders at lower yields accepted in full

Bids at higher yields are rejected The Coupon Rate is the higher yield rounded down to

the nearest one-eighth


20/56

When-Issued Trading Dealer Biding

Strategies

When issued (WI) Trading:

major feature of treasury auction

Begins immediately after the announcement

made by the treasury

lasts until the day of settlement

Dealers and investors participate actively taking

either long or short position for future settlementWI trades are forwarded contracts to be settled

on the new issue settlement date


21/56

WI treading is in terms of yields

Treasury announces the coupon after the auction

After announcement, WI trading is price basis ratherthan a yield basis

Securities issued several days after the auction

WI trading ends when the new security settles

Prior to the settlement, Buyer doesn't have to pay forthe purchase

AnnouncementDate Auction Date Settlement Date

WI Trading

Begins

(in yield)

Auction Results

And coupon rate

announcement

WI Trading

ends


22/56

WI Trading affects strategies, as it affects the

position going in to auction of buyer

Bidders, buying the securities, go into the

auction with long positions

Seller of securities go into the auction withshort positions

WI market serves as a price discovering role

It provides: Vital information on the strengthof demand and on the disparity of bidders

views about the market


23/56

Short Squeeze

Dealers enters auction with short positions, asthey have sold before the auction the security toclients who own the new issue

Must cover the short position before the issuedate by buying in the WI market

or borrow the security on the issue date to makegood on delivery

Common mechanism used is: The Reverserepurchase agreement, where dealer lendsmoney to the security holder in exchange for useof the security


24/56

Short Squeeze

The dealer is still in short in the security and is

exposed to the possibility of being unable to

purchase it at the anticipated price

Here, Dealer caught in a short squeeze

Short squeeze occurs when an auction

participants gains control of the majority of a

certain security and withholds the supply from

the cash or repurchase agreement markets


25/56

Coupon Rolls

Important part in the process of distributing newtreasury securities

Coupon Roll Trade: Dealer purchased an on-the-run treasury security

from a customer for the-next-day settlement Simultaneously sells to that customer the same

amount of the recently announced new security forforward settlement

Reverse Roll: A dealer sells an outstanding issue and buys a new

security


26/56

The forward in Roll trade:

A WI sale, settles on the new issue settlement

dateThe roll is the spread between the yield on thenew security and that on the outstandingissue in the same maturity segment

Give in roll:

indicates that the WI security provides a higheryield than the outstanding issue.

Take in rolls: The new issue has a lower yield


27/56

Coupon Rolls

Dealers use to accommodate customers who have apreference for liquidity

Tend to rolls to maintain positions in the current issues

Use to position themselves for bidding at upcoming

auctions Seek to execute a roll if he is short in the outstanding issuebecause e anticipated a market decline or has toaccommodate customers

Executing a roll, Dealer closes the short position on the

outstanding issue and creates a short position on the newsecurity.

Dealer has an incentive to bid more aggressively at theupcoming auction


28/56

Trading and Clearing of Treasury Securities

Theres 2 different types of trading systems-

1. Dealer Trading

2. Electronic Trading Systems


29/56

Dealer Trading

Dealer distributed information about each issue contains-Price

Yield

Dollar value of a basis point

Yield value of a 32nd

Dollar value of a basis point or DV01 is the change in the price of a bond

resulting from a one basis point change in its yield.

Yield value of a 32nd is estimated by calculating the yield to maturity if the

bond price changes in 1/32.


30/56

Sources of DealersProfit

The bid ask spread- varies depending on Liquidity, volatility

and remaining maturity.

Favorable market movement- such as Appreciation in

securities that the dealer is long, Depreciation in securities

that the dealer has short position.

Carry- difference between the interests earned on the

securities held in inventory and the financing costs.

Dealer Trading


31/56

Electronic Trading Systems

The market is moving from private network or leased line systems

to the Internet because it offers substantial competitiveadvantages.

Dealer

System-

Single dealer- customers trade with a specific dealer

Multidealer- consolidates bids and offers from multiple dealers

Cross-

Matching

System-

Provide a real time of periodic cross matching session where users can

execute transactions electronically with multiple counterparties on an

anonymous basis.

Two major types of ETS are-


32/56

International transactions are settled through the Clearing House

Interbank Payment Systems (CHIPS)

Govt. securities are cleared through Fedwire,

delivery vs. payment system

two transactions taking place simultaneously

decreasing and increasing the sellers and buyers account at thefederal reserve bank.

Clearing & Settlement in USA

l & l l d h


33/56

Objectives

Facilitating securities trades to encourage higher level of trading activities.

Reducing risks resulting from handling shares during trading process.

Applying the Delivery versus Payment principle (DVP), which is the norm in

international capital markets.Executing the clearing and settlement transaction at an exact specified

period.

Features

Customizable time frames to settle different types of securities to meet themarket rules.

Supporting the DVP (delivery versus payment) mechanism.

Integration with the Settlement Guarantee Fund (SGF) system.

Security measures to prove securities ownership authenticity.

Clearing & Settlement in BangladeshObjectives & Features


34/56

Agency securities are debt obligations issued by federal or federally sponsoredagencies.

Agency Securities

FRFIs: branches of the federal govt. that offer subsidized financing to selectedsectors. Through securities issuance Federal Financing Bank raises all funds for

FRFIs.

GSA: privately owned but perceived to carry an implicit govt. guarantee. They

issue their own securities.

Two types of federal agencies:

Federally related financial institutions (FRFIs)

Govt. Sponsored agencies (GSA)


35/56

Municipal Bond Market

The Municipal market ($ Billion)

Year Short-term Long-term Total issuance Outstanding

level

1993 47.5 295.5 340.0 1337.5

1994 40.3 165.1 205.4 1341.7

1995 38.3 159.9 198.3 1293.5

1996 41.7 185.0 226.7 1296.0

1997 46.4 220.5 266.9 1318.7

1998 34.7 286.2 320.9 1402.9

1999 36.6 227.4 264.0 1457.2

2000 41.0 200.2 241.2 1480.9

2001 56.2 286.6 342.8 1603.7

2002 72.4 357.7 430.1 1763.1

2003 69.8 382.8 452.6 1892.2

2004 58.2 360.3 418.5 2018.6

Source : Bond Market Association


36/56

Municipal Bond Market

Long term - Short term

Default rate

Insured new issue

Major municipal insurance companies

Financial guaranty Insurance company AMBAC Financial group

MBIA Corporation

Financial security assurance


37/56

Types of Municipal Securities

Municipal Securities

General obligation bonds Revenue bonds


38/56

Other Municipal Securities

Limited and special tax bonds

Industrial revenue bonds

Housing bonds

Moral obligation bonds

Municipal notes


39/56

Underwriting process

Issuance

Competitive bidding Negotiated deal


40/56

Underwriting processCompetitive bidding

The municipality will sell its bonds at a public auctionand after the bids are solicited from various underwriters

,the bonds are sold to the highest bidder , that is , the bid

that produces the lowest financing costs for the

municipality


41/56

Underwriting processUnderwriting processNegotiated deal

The municipality selects underwriter or underwriting

syndicate and if an underwriter has successfully handled

prior bond issues for the issuer ,the municipality may simply

use the underwriter again without soliciting other proposals

,otherwise the municipal issuer will request proposals from

several underwriters and make its selection after evaluating

all the proposals


42/56

Required Disclosure

Prepare official statements meeting the contentrequirements of the rule

File certain financial information and operatingdata with national and state repositories eachyear

Disclose any material event on a timely basis


43/56

General Exemption

A private placement exemption for securities sold tono more than 35 sophisticated investors who purchasefor investments , not distribution

An exemption for certain securities that the holderhas a right to tender at a price of at least par asfrequently as every nine months

An exemption for securities with maturity of ninemonths or less

C t D bt M k t


44/56

Corporate Debt Market

Allows corporations to borrow money from surplus unit

Accommodates various corporate debt instruments.

Matches corporate financing requirements

Short, medium and long term debt instruments areavailable


45/56

CorporateDebt Inst.

CorporateBond

SecuredBond

Unsecured Bond

Creditenhance

Bond

MTNCommercial paper

DirectlyPlaced

DealerPlaced

Types of Corporate Debt Instruments


46/56

Commercial Paper

Short-term unsecured promissory note.

Provide short-term funds for seasonal, working

capital needs and bridge financing.

Alternative to short term bank loans.

Cheaper than tapping a line of credit from a bank.


47/56

Maturities range from 1 day to 270 days.

Exempt from registration as long as the maturity does not

exceed 270 days.

Most common maturity range is 30 days or less.

CP holders are paid off at maturity through rolling over.

Issuers: financial companies and nonfinancial companies.

credit-supported & asset-backed commercial paper

Commercial Paper


48/56

Medium-Term Notes (MTNs)

Maturity ranges from 9 months to 30 years.

Distributed by securities firm on best efforts basis.

Sold in a smaller amount on a continuous basis.

Registered with the SEC under Rule 415.

Borrowers have flexibility in designing MTNs to

satisfy their own needs.


49/56

Corporate Bond

A promise by the company to pay periodic coupons andrepay the principal at maturity.

Underwriting and distribution handle by securities firms.

Bond may or may not be asset backed.

Mortgage Bond: backed by real estate.

Collateral Trust Bonds: backed by securities.

Debentures: backed by no specific assets.

Subordinate debentures: get paid third in line after secured debt

and debentures.

Guaranteed Bonds: guaranteed by another entity.


50/56

Types of Corporate Bond

Convertible Bond: gives the bondholder the right toconvert the bonds into shares.

Callable Bond: issuer has the right to pay off the debt

before maturity.

Puttable Bond: investor has the right to put back the

bond to the issuer at par.

Junk Bond: Bonds having credit rating of BB or lower.

Zero Coupon Bond: offers no coupon.

C b k i


51/56

No usage of Commercial Paper and MTN

Only Corporate bond is Mudaraba Perpetual Bond of

IBBL

Issuance Year: 2001

3,000,000 units/ TK. 1,000 each

Market Lot: 05

Perpetual term

Corporate Debt Market in BD

( )


52/56

Self Regulation (Rule 415)

Allows firms to register all securities expected to beissued over subsequent two year period.

Less costly and offers flexibility.

No separate prospectus for each act of offering.

Available to companies deemed reliable by SEC.

Shifts price risk and waiting risk to the underwriter

and investment banker.


53/56

Underwriting Spreads

Difference between the price paid by the buyers and

proceeds to the issuers

Gross spread is generally less than 1% in high qualityissue and 3% in junk bonds.

Gross spread is distributed among different intermediaries.

Loss is allocated among the underwriting syndicate

members at pre-agreed rate.


54/56

Risk Management

Unanticipated Price Surge:

Quick sale of shares.

Short Position: financial loss or green shoe position

Unexpected Price Fall:

Slow sale of shares.

Larger inventory of shares.

Financial loss borne by the Investment banker.


55/56

Private Placement

Differs from registered public deals in covenants and price.

Regular SEC registration process is not followed.

Lower Legal and registration expenses.

High degree of flexibility.

SEC rule 144A: inclusion of QIBs and reduction of

holding period.

Term Sheet and Covenants in private placement.


56/56

Thank You All

Documents

IPO of debt security in BD