Issue Briefing on Bond Prospectuses 7 May 2003 by Melanie Poepping Deutsche Bank Aktiengesellschaft Reference (apr02)
I. Debt Securities II. III. The Euro Market The Issuance Process IV. The Documentation Process V. Specific Issues 2 Reference (apr02)
I. Debt Securities What are Debt Securities? Reference (apr02)
Definition What are Debt Securities? Several names for the same thing: Bonds Notes Debt Instruments Debt Securities Issued in several ways: Stand-Alone Programme Medium Term Note Programme Debt Issuance Programme Note Programme Debt Issuance Facility Private Placement Public (syndicated) Placement 4 Reference (apr02)
The Debt Securities What types of Debt Securities exist? Products in the market: Eurobond a bond denominated in any currency issued by an international syndicate and offered to investors in a number of countries at the same time Domestic Bond a bond denominated in the currency of the country where it is issued Global Bond a bond issued and traded outside the country whose currency it is denominated in, and outside the regulations of a single country; usually a bond issued by a non-european company for sale in Europe or vice versa US Domestic Bonds Pfandbriefe 5 Reference (apr02)
The Debt Securities What kind of structures of Debt Securities exist? Structures in the market: straight debt fixed rate coupon floating rate coupon unsubordinated bonds public Pfandbriefe asset backed securities repackaged bonds exchangeable bonds structured debt indexed linked coupon reference rate coupon subordinated bonds mortgage Pfandbriefe mortgage backed securities high yield bonds convertible bonds 6 Reference (apr02)
The Debt Securities How are they issued? Debt Issuance Programme documentation framework under which the issuer is able to access the public and private capital markets in a wide range of currencies, maturities and innovative structures, without providing all documents (prospectus, dealer agreement, fiscal agency agreement) again for each issue the programme is listed on one or more stock exchanges and needs to be updated annually issues under the programme are documented by a pricing supplement Stand alone single documentation for a specific bond issue (prospectus, dealer agreement, fiscal agency agreement) providing detailed information about the issue and its terms and conditions prospectus will never be updated again except for an increase 7 Reference (apr02)
II. The Euro Market Issuers and investors Reference (apr02)
Issuers Who issues Debt Securities? Various industry groups issue Debt Securities: corporations financial institutions insurance companies supra-nationals sovereigns governmental agencies 9 Reference (apr02)
Issuers Why do they issue Debt Securities? Various reasons lead to the decision: get access to the capital markets gain a broad international and geographically diverse investor base gain publicity cover financial risks cover financing needs 10 Reference (apr02)
Investors Who invests in Debt Securities? Deutsche Bank s Investor base : usually institutional investors (the professionals ) from the same industry group as the issuers and private investors (the retail market ) sales are carried out in 26 centres around the world, by a total of more than 540 professionals Italy 4% Switzerland 5% Other 6% Singapore 3% Portugal 3% France 4% United Kingdom 8% Investor nationality by volume Luxembourg 2% Philippines 2% United States 9% Spain 2% Ireland 1% Netherlands 1% Hong Kong 15% Japan 20% Germany 15% 11 Reference (apr02)
III. The Issuance Process Business Perspective Reference (apr02)
The Issuance Process Using the window of opportunity Example: Issuance of a Eurobond on a stand-alone basis 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Mandate Letter Time Table Credit Research Rating Advisory Preliminary negotiation of legal documents Preliminary Prospectus Red Herring Start of listing process Raising investor interest through roadshow, one-on-one meetings Drafts and negotiation of legal documents 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 End of roadshow Start of book building period (indicative price) Drafts and negotiation of legal documents and prospectus Invitation of syndicate Launch Pricing Due Diligence Finalising of legal documents Finalising of Prospectus Signing of agreements Listing Approval Other legal / transaction matters Settlement / Closing 13 Reference (apr02)
The Issuance Process Using the window of opportunity Example: Issuance of a syndicated bond under a programme 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Start of book building period (indicative price) Prospectus for the programme already exists Invitation of syndicate Pricing Legal documentation framework for an issue already exists Launch Drafts and negotiation of legal documents Signing of agreements Listing Approval Settlement / Closing Sending Pricing Supplement to the Stock Exchange 14 Reference (apr02)
IV. The Documentation Process Legal and Transaction Management Perspective Reference (apr02)
The Documentation Process The main documents General Overview Prospectus Offering Circular, Information Memorandum, Listing Circular etc. Bond Purchase Agreement Subscription Agreement, Dealer Agreement Fiscal Agency Agreement Issue and Paying Agency Agreement Operations Memorandum Signing and Closing Agenda 16 Reference (apr02)
The Documentation Process Transaction related issues Debt Issuance Programme Prospectus contents summary of the programme terms and conditions for a variety of possible bond structures form of pricing supplement form of guarantee, if any description of the issuer / guarantor extract of the financial statement(s) of the issuer / guarantor profit & loss, balance sheet, cash flow statement, notes, auditors report, management report, outlook selling restrictions / taxation notes general information (listing, authorisation) 17 Reference (apr02)
The Documentation Process Transaction related issues Stand Alone Prospectus contents important notice for investors terms and conditions for a specific bond structures form of guarantee, if any description of the issuer / guarantor extract of the financial statement(s) of the issuer / guarantor profit & loss, balance sheet, cash flow statement, notes, auditors report, management report, outlook selling restrictions / taxation notes general information (listing, authorisation) 18 Reference (apr02)
V. Specific Issues Retail Market and Denomination, Listing and Increase of Bonds Reference (apr02)
Specific Issues Retail Market The importance of private investors is growing change of investment behavior in difficult economic environment bond market as safe haven more educated investors as in previous years 20% of total bond size for retail investors professionals (e.g. saving banks, retail banks) buy bonds in order to re-sell them into the retail market reaching a wide range of investors in all European countries 2 260 3 25 770 Number of branches for Private and Business Clients 35 250 20 Reference (apr02)
Specific Issues Retail Market Requirements for the retail market Enabling private investors to diversify their portfolio: small denominations EUR 1,000 or any equivalent in other currencies offering a wide range of bond structures taking into account the possible risk factors of the structure offering guaranteed bonds 21 Reference (apr02)
Specific Issues Listing of Bonds Bond issued under a programme the prospectus is already listed at the stock exchange pricing supplement is seen as supplement to the prospectus - with information to the specific bond all issues under the programme within the following year will be automatically be listed at the stock exchange maximum time: 2 days Bond issued as stand alone prospectus needs to be approved by the relevant stock exchange prospectus will be filed with the stock exchange and amendments will be discussed maximum time (depending on the stock exchange): 15 days no extension of this period 22 Reference (apr02)
Specific Issues Increase of Bonds Bond issued under a programme no change of the prospectus pricing supplement is seen as supplement to the prospectus new pricing supplement for the increase Bond issued as stand alone increase is shortly after the original issue wrap-around to the original prospectus of the issue giving detail of the increase increase a while after the original issue supplemental prospectus giving detail of the increase and referring to the original prospectus 23 Reference (apr02)
by Melanie Poepping / Deutsche Bank AG Appendix A: Glossary Asset-backed Securities Bloomberg Bond Bookrunner Closing Collateralised Bond Obligation Collaterised Loan Obligation Commercial Papers Coupon Coupon rate Dealer Definitives Domestic Bonds Due Diligence Instruments for transforming claims tied up in the balance sheet into negotiable securities. Bloomberg is an electronic financial information platform often used for the publication of company and financial market information (e.g. ad-hoc-publication service). An interest bearing or discounted government or corporate security that obligates the issuer to bay the bond holder a specified sum of money, usually at specific intervals, and to repay the principal amount of the load at maturity. Lead manager who is responsible for keeping the order book for orders to purchase the bonds. Phase shortly before settlement, where all conditions precedents were collected and payments for the funds arranged. An investment-grade bond backed by a large, diversified pool of high yield bonds. Usually broken down into tiers with varying degrees of risk and varying interest rates. A debt security backed by a pool of commercial loans. Short-term obligations with maturities ranging from 2 to 364 days issued by banks, corporations and other borrowers. Such instruments are unsecured and usually discounted, although some are interest bearing. The periodic interest that bond investors receive throughout the life of the security. Generally the larger a bond s coupon the less its price will change when market interest rates fluctuate. The percentage which is multiplied by the principal to arrive at the yearly coupon payment. While many bonds pay interest more often than annually, coupon rates are given in annual percentages. Firm whose primary business is entering into transactions on both sides of wholesale financial markets and seeking profits by taking risks in these markets. Physical delivery of bonds. A bond denominated in the currency of the country where it's issued. Process of intensive examination of the financial and economic situation and planning of a company by external experts, mostly banks, lawyers and auditors. - 1 -
by Melanie Poepping / Deutsche Bank AG EMTN- Programme Eurobonds Floating rate bond Global Bond High Yield Hybrid Capital or Balanced Funds Issuer Junk Bonds (see also high yield) Kangaroos Maturity Maturity Date An EMTN-Programme provides a documentation framework under which the issuer is able to access the public and private Euromarkets in a wide range of currencies, maturities and innovative structures, without providing all documents (prospectus, dealer agreement, fiscal agency agreement) again for each issue. The EMTN-Programme is listed on one or more stock exchanges and needs to be updated annually. A bond that denominated in any currency and is issued by an international syndicate and offered to investors in a number of countries at the same time. A type of bond where the coupon changes periodically based on some predetermined benchmark such as the spread above the yield on a six-month Treasury security. A bond issued and traded outside the country whose currency it is denominated in, and outside the regulations of a single country; usually a bond issued by a non-european company for sale in Europe or vice versa. High Yield bonds are issued by lower-rated corporations, sovereign countries and other entities rated Ba or BB or below and offering a higher yield than more creditworthy securities; sometimes known as junk bonds. A mutual fund that buys a combination of common stock, preferred stock, bond, short term bonds, to provide both income and capital appreciation while avoiding excessive risk. The purpose of balanced funds (also sometimes called hybrid funds) is to provide investors with a single mutual fund that combines both growth and income objectives, by investing in both stocks (for growth) and bonds (for income). Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss; the flip side, of course, is that balanced funds will usually increase less than an all-stock fund during a bull market. A government, corporation, municipality or agency who issues a security in order to raise capital. A high-risk, non-investment-grade bond with a low credit-rating, usually BB or lower; as a consequence, it usually has a high yield. Slang for Australian securities or issued in Australian Dollar. 1. The length of time until the principal amount of a bond must be repaid. 2. The end of the life of a security. The date on which a bond's principal or other liability investment is repaid to the investor and interest payments stop. - 2 -
by Melanie Poepping / Deutsche Bank AG Medium Term Note Mortgage-backed Securities Order book Over-the-counter market (OTC) Pfandbriefe Primary Market A debt security issued under a program that allows the offering of notes continuously to investors through an agent (dealer, usually a financial institution). The size and terms of medium term notes may be customised to meet investor s needs. Maturities can range from one to 30 years. A security that represents an investment in mortgage loans. An investor owns an undivided interest in a pool of mortgages, which serves as the underlying assets for the security. A centralised market where prices are determined by an order execution algorithm from participants sending firm buy and sell orders. A securities market that is conducted by dealers throughout the country through negotiation of price rather than through the use of an auction system as represented by a stock exchange. In Germany, Pfandbriefe are debt securities, which are used to refinance first-rank loans secured by mortgages or land charges (mortgage Pfandbriefe) or to refinance loans to the public sector (public Pfandbriefe, which were formerly known as communal bonds). They are, in essence, covered debt securities. They can be issued by private mortgage banks by virtue of the Mortgage Bank Act, by private ship mortgage banks by virtue of the Ship Mortgage Bank Act, and by public sector credit institutions by virtue of the Public Pfandbrief Act. The primary market consists only of a consortium of financial institutions, which initially buys the bonds issued by the respective issuer in order to sell them via their distribution channels into the secondary market. Private Placement The negotiated offering of new securities directly to investors, without a public underwriting, usually not listed at a stock exchange. Prospectus Public Placement Repo A document that must be provided to investors before they buy the bonds. The prospectus describes the product for sale, the investing objectives, past performance, the issuer and his business, management, potential risks, tax considerations, fees, terms and conditions, selling restrictions and other relevant data needed to make an informed investment decision. The negotiated offering of new securities directly to investors, with a public underwriting, usually listed at a stock exchange. Financial instrument which serves to exchange cash temporarily for securities for a predetermined period. Various legal arrangements exist to perform this basic economic function (repurchase agreements, reverse repurchase agreements, sell/buybacks and securities lending). All forms of repos entail a change in ownership. - 3 -
by Melanie Poepping / Deutsche Bank AG Repackaged Notes Roadshow Existing bond that is put into another debt structure or new bond in case of a failed repayment of the existing bond or because of other reasons. A team consisting of originators and officials of the issuer (e.g. Deputy CEO, Finance Director and Group Treasurer) visit the major financial centres of Europe in order to meet with potential investors to present the issuer and his credit history, his current business as well as his future plans. The aim is to attract broad investor interest for the planned issue and to strengthen the potential for future issuance. Samurai A yen denominated bond that is issued in Tokyo but by a company that is not Japanese. Secondary Market The secondary market consists of whether professional investors, such as insurance companies or funds, or retail clients, usually private investors. Financial institutions offer the bonds bought in the primary market via their distribution channels or business relationships into this secondary market. Settlement Spread Straight Debt Structured Credit / Debt Subordinated Notes Completion of a transaction by exchange of instruments and funds. The terms spread refers to the differential between the buying and the selling price. Latent factors which influence the size of the spread include transaction costs, hedges against price fluctuations and an adverse selection component. The latter factor offers protection for the party setting the price from his potential counterparty, giving different levels of information. Straight debt means plain vanilla structures as a fixed or floating rate coupon and an average maturity. A bond is called structured if the coupon is linked to an index or offers options that are normally not covered with a straight bond. Securities with a promise to pay that cannot legally be fulfilled until payments on certain other obligations have been made. Subordinated debt Debt that is either unsecured or has a lower priority than that of another debt claim on the same asset or property. Swap Swaps present a financing technique in which two parties exchange interest rates or currency positions. Examples here are the swapping of fixed euro interest rates or floating euro interest rates ( interest rate swap ) or amounts in US dollars for euro amounts ( currency swap ). Depending on whether such transactions affect the assets or liabilities side of the balance sheet, they are called asset or liability swap. Yankee Yield Dollar-denominated bond issued in the U.S. by foreign corporations, banks and governments. The annual percentage rate of return earned on a security. Yield is a function of a security s purchase price and coupon interest rate. - 4 -
by Melanie Poepping / Deutsche Bank AG Appendix B: Indicative Time Table for a Eurobond arranged between = external line Legal Syndicate Origination/ Others Advisory /timetable Mandate Letter Origination/ Others Credit approval Time Table Mandate Letter Syndicate Legal Time Table Mandate Letter external line Selecting Agent before pitch pitch Rating Agencies Issuer advises auditors for comfort letter Issuer provides requested information, documents, conditions precedent Negotiation of draft documentation with issuer throughout the whole process Invitation of the Dealers Due Diligence Call Rating Advisory Group Selecting Managers Raising investor interest: roadshow, conference call, press & publicity Bookbuilding Launch Pricing Fixed Income Research Credit research One-on-one investor meeting Negotiation with Sales&Trading Screen invitation of the Dealers Start drafting docs. Negotiation of the comfort letter with the auditors Listing process Negotiating documents with Dealers, legal counsel, stock exchange Arranging Settlement / Payment Delivering Notes to Clearing System Appointing external counsel, printer for prospectus by Legal after selection before launch before settlement after launch before settlement settlement Funds payed to Issuer Signing of the Agreements time Collecting conditions precedent from all parties Bond listed on the Stock Exchange - 5 -
by Melanie Poepping / Deutsche Bank AG - 6 -