Sunteți pe pagina 1din 56

Welcome to Our Presentation

Presentation Topic: Chapter 6: Debt Underwriting

Presented by: Group: 06

Group: 06
Nazim Reza Tauhidul Islam Rafsan Mahtab 16-011 16-071 16-087

Md. Rezaur Rahman


Md. Nazmush Shakib

16-040
16-035

Government Securities Market


Investment Banks works as Primary Dealers in

US treasury Market. Huge amount of treasury securities are sold in recent year to support the deficit.

Types of Government Securities


1. a) b)

c)
2. a. b.

Treasury Bills Short term security (up to 1 year) Discounted instrument 4, 13, 26 weeks bill Treasury notes Medium term security (semi annual coupon) 2, 3, 5, 10 years Current interest rate benchmark Treasury bonds 20 - 30 years bonds (Quarterly coupon) suspended in 2001, reissued in 2006 Treasury Inflation Protection Securities (TIPS)
Fixed interest rate with inflation adjusted principal. Holder receive adjusted principal amount at maturity.

c.
3. a. b. 4.
a) b)

Government Securities Market: Continued


U.S. Treasury Securities Outstanding USD Billions
Bills 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 777.4 715.4 691.0 737.1 646.9 811.2 888.7 928.8 1,001.2 960.7 940.8 999.5 1,861.2 1,793.5 1,772.5 1,520.5 1,629.0 Notes 2,112.3 2,106.0 1,960.7 1,784.5 1,557.3 1,413.9 1,580.9 1,905.7 2,157.1 2,360.2 2,440.5 2,487.4 2,791.5 4,181.1 5,571.7 6,605.1 7,327.1 Bonds 555.0 587.3 621.2 643.7 626.5 602.3 588.5 564.2 539.4 516.4 530.5 558.4 591.9 717.9 892.6 1,064.1 1,240.2 TIPS2 33.0 67.6 100.7 121.2 140.1 146.8 176.2 245.9 328.6 411.1 471.4 529.6 568.1 616.1 738.8 849.8 Total 3,444.7 3,441.7 3,340.5 3,266.0 2,951.9 2,967.5 3,204.9 3,574.9 3,943.6 4,165.9 4,322.9 4,516.7 5,774.2 7,260.6 8,853.0 9,928.4 11,046.1

Source: US Treasury

2013

1,607.9

7,386.2

1,253.2

860.9

11,108.2

Coupon Stripping
STRIPS: Separate Trading of Registered Interest

and 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 and appropriate principal amount. Reconstitution reflects efficiency through the possibility of arbitrage.

Treasury Inflation-Indexed Securities


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 the

possibility 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.

Market Quotations
Published in The Wall Street Journal and other

newspapers under the headline of Treasury bonds, notes and bills Treasury Strips are quoted in terms of price. Types of strips are indicated asci = coupon strip np = note principal strip bp = bond principal strip

Government Securities: Perspective Bangladesh


Bangladesh Bank issues and trades i. 30-day BB Bill, ii. 91-day, 182-day & 364-day T-Bills iii. 5-yr, 10-yr,15-yr & 20-yr Treasury Bonds

Transaction of govt. securities goes online from December 17, 2012

Government Securities: Perspective Bangladesh (Continued)

Government Securities: Perspective Bangladesh (Continued)


Directorate of national savings issues:

a) Bangladesh Sanchayapatra of 5years and 3


b)

c)
d) e)

months maturity. Pensioner and Paribar Sanchayapatra Bangladesh Prize Bond Investment and Primer bond in USD ($) Savings Banks

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

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

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

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

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

Auction process
Dealer prohibited from bidding both competitive and noncompetitively for its own account in the same auction Competitive bidders are permitted to submit more 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)

Auction process
Treasury nets out the total amount of noncompetitive tenders allocates the balance to competitive bidders with bids at per below the high yields(stop yields) The Auction is Single price or Dutch auction (bidders awarded 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

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 settlement WI trades are forwarded contracts to be settled on the new issue settlement date

WI treading is in terms of yields Treasury announces the coupon after the auction After announcement, WI trading is price basis rather than 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 for the purchase

Announcement Date WI Trading Begins (in yield)

Auction Date Auction Results And coupon rate announcement

Settlement Date WI Trading ends

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 with short positions WI market serves as a price discovering role It provides: Vital information on the strength of demand and on the disparity of bidders views about the market

Short Squeeze
Dealers enters auction with short positions, as they have sold before the auction the security to clients who own the new issue Must cover the short position before the issue date by buying in the WI market or borrow the security on the issue date to make good on delivery Common mechanism used is: The Reverse repurchase agreement, where dealer lends money to the security holder in exchange for use of the security

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

Coupon Rolls
Important part in the process of distributing new treasury 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 for forward settlement

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

The forward in Roll trade:


A WI sale, settles on the new issue settlement date

The roll is the spread between the yield on the new security and that on the outstanding issue in the same maturity segment Give in roll:
indicates that the WI security provides a higher yield than the outstanding issue.

Take in rolls:
The new issue has a lower yield

Coupon Rolls
Dealers use to accommodate customers who have a preference 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 issue because e anticipated a market decline or has to accommodate customers Executing a roll, Dealer closes the short position on the outstanding issue and creates a short position on the new security. Dealer has an incentive to bid more aggressively at the upcoming auction

Trading and Clearing of Treasury Securities


Theres 2 different types of trading systems1. 2. Dealer Trading Electronic Trading Systems

Dealer Trading
Dealer distributed information about each issue containsPrice 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.

Dealer Trading
Sources of Dealers Profit
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.

Electronic Trading Systems


The market is moving from private network or leased line systems to the Internet because it offers substantial competitive advantages.
Two major types of ETS are-

Dealer System-

Single dealer- customers trade with a specific dealer Multidealer- consolidates bids and offers from multiple dealers

CrossMatching System-

Provide a real time of periodic cross matching session where users can execute transactions electronically with multiple counterparties on an anonymous basis.

Clearing & Settlement in USA

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 the federal reserve bank.

Clearing & Settlement in Bangladesh


Objectives & Features

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 the market rules. Supporting the DVP (delivery versus payment) mechanism. Integration with the Settlement Guarantee Fund (SGF) system. Security measures to prove securities ownership authenticity.

Agency Securities
Agency securities are debt obligations issued by federal or federally sponsored agencies.

Two types of federal agencies:


Federally related financial institutions (FRFIs)

Govt. Sponsored agencies (GSA)

FRFIs: branches of the federal govt. that offer subsidized financing to selected sectors. 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.

Municipal Bond Market


The Municipal market ($ Billion)
Year 1993 Short-term 47.5 Long-term 295.5 Total issuance 340.0 Outstanding level 1337.5

1994
1995 1996 1997

40.3
38.3 41.7 46.4

165.1
159.9 185.0 220.5

205.4
198.3 226.7 266.9

1341.7
1293.5 1296.0 1318.7

1998
1999 2000 2001

34.7
36.6 41.0 56.2

286.2
227.4 200.2 286.6

320.9
264.0 241.2 342.8

1402.9
1457.2 1480.9 1603.7

2002
2003 2004

72.4
69.8 58.2

357.7
382.8 360.3

430.1
452.6 418.5

1763.1
1892.2 2018.6

Source : Bond Market Association

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

Types of Municipal Securities

Municipal Securities

General obligation bonds

Revenue bonds

Other Municipal Securities

Limited and special tax bonds Industrial revenue bonds


Housing bonds Moral obligation bonds Municipal notes

Underwriting process

Issuance

Competitive bidding

Negotiated deal

Underwriting process
Competitive bidding

The

municipality will sell its bonds at a public auction and 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

Underwriting process
Negotiated 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

Required Disclosure
Prepare official statements meeting the content requirements of the rule File certain financial information and operating data with national and state repositories each year

Disclose any material event on a timely basis

General Exemption
A private placement exemption for securities sold to no more than 35 sophisticated investors who purchase for investments , not distribution An exemption for certain securities that the holder has a right to tender at a price of at least par as frequently as every nine months An exemption for securities with maturity of nine months or less

Corporate Debt Market


Allows corporations to borrow money from surplus unit

Matches corporate financing requirements

Accommodates various corporate debt instruments.

Short, medium and long term debt instruments are available

Types of Corporate Debt Instruments

Corporate Debt Inst.

Corporate Bond

MTN

Commerci al paper

Secured Bond

Unsecure d Bond

Credit enhance Bond

Directly Placed

Dealer Placed

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.

Commercial Paper
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

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.

Corporate Bond
A promise by the company to pay periodic coupons and repay 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.

Types of Corporate Bond


Convertible Bond: gives the bondholder the right to convert 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.

Corporate Debt Market in BD


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

Self Regulation (Rule 415)


Allows firms to register all securities expected to be issued 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.

Underwriting Spreads
Difference between the price paid by the buyers and proceeds to the issuers Gross spread is generally less than 1% in high quality issue and 3% in junk bonds. Gross spread is distributed among different intermediaries. Loss is allocated among the underwriting syndicate members at pre-agreed rate.

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.

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.

Thank You All

S-ar putea să vă placă și