What are the Medium-Term Notes (MTN)?
Medium-term notes are debt securities issued by the organization over a period of time continuously with maturities usually ranging from 5 years to 10 years. Unlike bonds that are issued once, MTN is issued and sold continuously by a dealer or various dealers over a period of time. MTNs are transacted on a Medium-term note brokerage which and not on an exchange. An investment bankInvestment BankInvestment banking is a specialized banking stream that facilitates the business entities, government and other organizations in generating capital through debts and equity, reorganization, mergers and acquisition, etc. that acts as a dealer sells the notes to the investors on a best-efforts basis and there is no obligation on the dealer to sell a specified amount or the whole of the notes on behalf of the issuer.
- Medium-term notes are targeted on large institutional investorsInstitutional InvestorsInstitutional investors are entities that pool money from a variety of investors and individuals to create a large sum that is then handed to investment managers who invest it in a variety of assets, shares, and securities. Banks, NBFCs, mutual funds, pension funds, and hedge funds are all examples. and high net worth individuals, unlike bonds that are issued to the masses on the open market. The medium-term notes can be callable which means the issuer can repay the outstanding amount to the investors after a specified amount of time as mentioned in the prospectus and related documents released at the time of the issuance.
- An issuer needs to generate unique identifiers for the notes that are issued in a Medium-term note program. These identifiers can be International Securities Identification Number (ISIN) or Committee on Uniform Security Identification Procedures (CUSIP)(CUSIP)CUSIP is an abbreviation for the Committee on Uniform Securities Identification Procedures. It is a unique identification code assigned to most financial instruments, including stocks registered with all American and Canadian corporations, commercial papers, and US government and municipal bonds. depending on the market it is issued in.
Types of Medium-Term Notes
Depending on the location of the issue of the notes, these are either termed as US Medium-term notes or Euro medium-term notes.
#1 – US Medium-Term Notes
The medium-term notes that are issued to the investors in the United States are called US Medium-term notes. These are issued and traded in the United States and need to be issued via a US Medium Term Note program. The issuer needs to file a shelf registration of $100 million to $1 billion worth securities with the U.S. Securities and Exchange Commission.
Once the SEC approves the initial application, the issuer files the prospectus describing the Medium-term note. The prospectus has all the broad level information regarding the note issuance. It also has information regarding all the investment banks that are involved in the sale of these notes. The investment banks charge an underwritingUnderwritingThe underwriters take the financial risk of their client in return of a financial fee. Market Makers like financial institution and large banks ensure that there is enough amount of liquidity in the market by ensuring that enough trading volume is there. fee for formulating structured products on the basis of the notes issuance.
On 18th July 2019, the Medium Term note for $50,000,000 was issued by The Federal Home Loan Mortgage Corporation (Freddic Mac). The notes bear a fixed interest payment of 2.25% and mature in Jan 2022. The denomination for the notes is $1,000 per note and increments thereof. The first interest payment date is 18th Jan 2020. Underwriters for the notes are Jefferies & Co. Inc., Wells Fargo Securities LLC, and BNY Mellon Capital Markets LLC.
As per the pricing supplement of the notes, the notes are callable after the first interest payment date. The notes bear a fixed coupon which will be paid semi-annually on every Jan 18th and Jul 18th.
Since the notes are issued in the United States for the investors in the United States, this is a US Medium Term Note.
#2 – Euro Medium-Term Notes
When the notes are issued and traded outside the United States and Canada, the notes are called Euro Medium Term Notes. Issuers are facilitated to enter foreign markets easily to gain capital via the issuance of Euro Medium-Term Notes. The Euro Medium-Term Notes allow issuers to access a wide range of markets and currencies. Like US Medium Term Notes, Euro Medium-Term Notes are issued continuously with varying maturities.
Telefónica Emisiones, S.A.U. a Spanish telecommunication provider issued notes worth €40,000,000,000. These notes were to be issued in Series and each Series would have one or more tranches of issuance. The interest rate on these notes will either be fixed or floating which will be further specified in the final terms of the note issuance. The notes are callable after a specified period of time depending on the issuance document.
The dealers involved in the note issuance is BNP Paribas, Banco Bilbao Vizcaya Argentaria, S.A., Banco Santander, S.A., Barclays Bank PLC, Merrill Lynch International, BofA Securities Europe SA, Deutsche Bank AG, UBS Europe SE, Commerzbank Aktiengesellschaft, Credit Suisse Securities (Europe) Limited, Goldman Sachs International, HSBC Bank plc, J.P. Morgan Securities plc, Citigroup Global Markets Limited, Mizuho International plc, Morgan Stanley & Co. International plc, NatWest Markets N.V., Société Générale, and UniCredit Bank AG, to name a few.
Since the note is issued outside the United States and Canada, the note is a Euro Medium Term Note.
- The rate of return on an MTN is higher than other short term investmentsShort Term InvestmentsShort term investments are those financial instruments which can be easily converted into cash in the next three to twelve months and are classified as current assets on the balance sheet. Most companies opt for such investments and park excess cash due to liquidity and solvency reasons..
- It allows investors to invest in security between the short term and long term investment options.
- Medium-term notes are customized securities that are tailored to meet the issuer’s needs which help the issuers to make more out of the debt issuance at a lower cost.
- It allows the issuer to enter diversified markets along with a plethora of structured products.
- The MTN market allows the issuer to raise capital discreetly since the issuer, dealer and investor are the only participants that are involved in the primary transaction.
- The cost of servicing of Medium-term notes is incremental and hence can offset the savings made on interest rate payments.
- Since US Medium-term note issuance has stringent issuance documentation, issuers prefer issuing public bonds instead of multiple note issuances.
- Medium-term notes are debt securities that are sold by a dealer on behalf of an issuer continuously over a period of time with maturities ranging from 9 months to 30 years.
- Medium-term notes bear interest and can have either fixed or floating coupon rates linked to an interest rate like EuriborEuriborThe Euro Interbank Offer Rate (Euribor) is the interest rate at which European Union banks lend funds to each other. It is a daily changing benchmark and reference interest rate that includes terms ranging from a week to a year. or LIBORLIBORLIBOR Rate (London Interbank Offer) is an estimated rate calculated by averaging out the current interest rate charged by prominent central banks in London as a benchmark rate for financial markets domestically and internationally, where it varies on a day-to-day basis inclined to specific market conditions..
- Medium-term notes can also have complex interest rates which can be linked to swap ratesSwap RatesSwap rate refers to the fixed exchange rate of a swap contract as ascertained by the parties or the market. The rate is inclusive or exclusive of the spread and determined on the benchmark rates such as LIBOR or MIBOR. or other structured products.
This has been a guide to what is Medium-Term Notes and its Definition. Here we discuss Top 2 types of Medium-term notes (US and Euro MTN) along with examples, advantages, and disadvantages. You can learn more about Accounting from the following articles –