Issuance Process

What is the process of issuing a Eurobond?

In essence, issuing a Eurobond is similar to a pitch. A bond issuer will pitch to a large group of (global investors) in an attempt to borrow funds. The chapters in this section will explain the process following when issuing a Eurobond.

Issuance starts with the appointment of advisers (“bookrunners”), followed by the preparation of an investor presentation. Once the presentation is completed, a so-called “roadshow“ commences before preliminary details on the structure of the Eurobond are released. Once investor meetings have been completed, the new Eurobond issue will be open to subscribe to and an orderbook is built. At a given time the orderbook goes subject and new subscriptions are only accepted on a conditional basis. At completion, nominal allocations are disclosed to investors who subscribed for the issuance and the general market is informed of the final issue yield, coupon rate and amount issued. After completing the issuance, the bond usually become “Free-for-Trade” in the secondary market the day after.

Appointing Bookrunners

Prior to visiting investors, the issuer will have a good idea how much they wish to borrow, for how long and what they can afford. The first step an issuer will take is to hire (investment) banks to help pool investors, draft an investor presentation and host investor meetings. The banks are referred to us “bookrunners” and will help the issuer build the orderbook.

As the name suggests, one of the main tasks is the orderly building of the orderbook of the Eurobond. Organising the roadshow, hosting investor calls and managing the expectations of the issuers are amongst other talks a bookrunner will have.

After the bookrunners have been appointed, it’s common the issuer will make a public statement announcing a possible issuance of a Eurobond and confirming the bookrunners.

 A bookrunner who handles most administrative tasks related to building the order book and subscription allocations to investors is called a B&D. also allocates the newly issued Eurobond to investors is the Bookrunner & Dealer. Put simply, this will be the bookrunner an investor will receive the trade confirmation from.

Hosting a Roadshow

The next step is to host face-to-face meetings in major finance hubs across the globe to address any questions investors may have and to “properly” present the issuer.  This is called a “roadshow”.  A roadshow usually takes 1-2 weeks and includes one-on-one meetings with large investors, group meetings and possibly investor lunches. A virtual roadshow is increasingly becoming popular and the more seasoned issuers frequently forego hosting a roadshow in the first place.

During a roadshow the issuer will collect useful information with respect to the rate of return investors are demanding, the amount it will be able to borrow and for how long. The feedback from potential investors will feed into an Initial Price Target (IPT). 

Setting an Initial Price Target

A function of a roadshow is to establish a feedback loop between the issuer and investors. Key to a successful issuance is striking the right price for the issuer on one hand and investors on the other hand.

A high coupon rate or issue yield may favour investors; however investors do no wish an issuer to face unaffordable debt service costs that could lead to default. Also, the issuer has an incentive to borrow funds at an affordable rate.

The first feedback related to the issue yield, and eventually the coupon rate, is the Initial Price Target (IPT). In other words, an IPT provides the first insight to investors at what coupon rate and issue yield the new Eurobond may be issued at. Unlike the term suggests, an IPT is expressed in percentages instead of a cash price and usually take the shape of a range, such as an IPT of 6.25%-6.875% for example.

For bonds that are issued at cash price of exactly 100%, the issue yield is the same as the coupon rate. For an issue price below 100%, the issue yield is higher than the coupon rate and vice versa.

An IPT together with a possible issuance date is usually communicated by the bookrunners to investors at the end of the of roadshow, however it is possible to disclose this prior or during the roadshow too. The issuer and bookrunners will choose their words carefully though. Details on the exact amount borrowed and the issue yield are only disclosed after the roadshow at the day the orderbook opens for issuance. This is done in order to prevent disappointment to market participants in case no issuance follows.

Once all physical and virtual meetings are concluded, the syndicate of bookrunners and issuer will announce the issuance of the Eurobond. The exact size, issue yield and coupon rate are disclosed.

Building the Book

Once the Initial Price Target has been set, the subscription book officially opens.  Investors are now able to subscribe to the new Eurobond issuance. A time deadline is given until investors have the time to subscribe. During the course of the bookbuilding process, several updates are provided by the bookrunners to disclose the size of orderbook and possible changes to the Initial Price Target. In case the orderbook grows quicker than expected, the issuer may decide to borrow much funds than initially planned or to reduce the issue yield. The opposite can hold too in case limited interest is received.

Allocations

Once the time deadline has passed for placing an order for a new Eurobond, the orderbook is said to be “subject”, Although investors are still able to subscribe after this cut-off time, there is a low probability of success. Although the bookrunners have updated the issuer during the bookbuild, the closing of the orderbook provide a clear snapshot of the accumulated interest. With some help of the issuer, the bookrunners decide how much each investor is allocated. It is widely believed that the allocation process if largely at the discretion of the bookrunners. It’s the task of the bookrunners to ensure an orderly release of the new Eurobond to the secondary market. For this reason, the client and market knowledge of bookrunners allows them to allocate not purely based on subscription amount, but also on type, geography and general investor behaviour.

Allocation amount are communicated through the sales teams of the bookrunners and the bookrunner & dealer (“B&D”) will issue trade confirmations and will handle other administrative tasks.

What is the grey market?

The grey market sits between the primary and the secondary market. Market participants may choose to purchase or sell a Eurobond becomes Free-for-Trade. The view that the new Eurobond may be priced too low or too high in the primary market is the main trigger to transactions before the secondary market goes live. A key risk in the grey market is for the seller, who is selling prior to knowing what the allocation in the primary market has been.

What is Free-for-Trade?

Once a Eurobond is priced and allocated to all the investors who subscribed, the bond because available to trade in the secondary market. This is generally referred to as “Free-for-Trade” or “FFT”.

What is the difference between a primary and secondary market?

As the name states, the primary market is the first time a Eurobond is introduced to the bond market. This is usually done through an auction where bond investors can subscribe to. Once the bond has been launched, the bond can be actively traded in what is called the secondary market. The secondary market includes all market participants and active bid/ask quotes are provided.