What is the process of issuing a Eurobond?
Issuing a Eurobond is like a pitch. A bond issuer will pitch to a large group of (global investors) to borrow funds. This section will explain the process followed when issuing a Eurobond.
Issuance starts with the appointment of advisers (“bookrunners”), followed by the preparation of an investor presentation. After the presentation is completed, a so-called “roadshow” commences before preliminary details on the structure of the Eurobond are released.
Following investor meetings, investors will be able to subscribe to the new Eurobond issue and an orderbook is built. At an approximate pre-set time, the orderbook will go subject with new subscriptions only being accepted on a conditional basis.
At last, 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 issuance, the bond becomes “Free-for-Trade” in the secondary market the day after.
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 advisers to help pool investors, draft an investor presentation and host investor meetings. The said advisers are referred to as “bookrunners” and will help the issuer build the orderbook.
As the name somewhat suggests, one of the main tasks for bookrunners 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 the deliverables a bookrunner will have.
After the bookrunners have been appointed, it is common the issuer will make a public statement announcing a possible issuance of a Eurobond and confirming the bookrunners.
Confirming the Bookrunner & Dealer (B&D)
A bookrunner who handles most of the marketing, logistical and administrative tasks related to building the order book and subscription allocations to investors is called the Bookrunner & Dealer (“B&D”).
In the event an investor receives an allocation from a subscription to the issuance, the Bookrunner & Dealer will be the one sending an investor the trade confirmation following.
Hosting a Roadshow
The next step is to host virtual or face-to-face meetings with investors that are identified as most relevant by the bookrunners. Physical meeting usually take place in major finance hubs across the globe to address any questions investors may have and to “properly” present the issuer. This is formally referred to as a “roadshow”.
A roadshow usually takes up to 2 weeks and includes one-on-one meetings with large investors, group meetings and possibly investor lunches. Virtual roadshows are increasingly becoming more popular, especially since the global COVID-19 pandemic. Also, more seasoned issuers frequently forego hosting a roadshow given their significant awareness amongst investors.
During a roadshow the issuer will collect useful information with respect to the rate of return investors are demanding, the amount they will be willing to lend and for what tenor. The feedback from potential investors will feed into an Initial Price Target ("IPT").
Setting an Initial Price Target (IPT)
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 and investors.
A high coupon rate or issue yield may favour investors, however investors do not 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 and keep borrowing costs as low as possible.
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 a percentage format instead of a cash price format 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.
The IPT and a possible issuance date are usually communicated by the bookrunners at the end of the of roadshow, however it is possible to disclose this prior or during the roadshow. The issuer and bookrunners will choose their words carefully though. Details on the exact amount and the issue yield are only disclosed after the roadshow on 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 investor meetings are concluded, the syndicate of bookrunners and issuer will announce the issuance of the Eurobond. The proposed issue size, issue yield and coupon rate are finally disclosed.
Building the Book
Once the Initial Price Target (“IPT”) has been set, the orderbook officially opens. Investors are now able to subscribe to the new Eurobond issuance. A deadline is given until investors have the time to subscribe.
During the book-building process, several updates are provided by the bookrunners to disclose the size of orderbook and possible changes to the Initial Price Target (“IPT”). In case the orderbook expands more rapidly than expected, the issuer may decide to borrow more funds than initially planned or to reduce the issue yield or vice versa.
Once the deadline has passed for placing an order for a new Eurobond, the orderbook is said to be “subject”. Although investors will still b able to subscribe after this cut-off time, the chance of getting an allocation is minimal. Although the bookrunners will keep the issuer updated during the book-building process, the closing of the orderbook provides a clear snapshot of the accumulated interest amongst investors. With help of the issuer, the bookrunners decide how much each investor is allocated.
It is widely believed that the allocation process is largely at the discretion of the bookrunners. It is the task of the bookrunners to ensure an orderly release of the new Eurobond to the secondary market. A subscription for a high nominal amount of the Eurobond usually translates to a substantial allocation too, bookrunners (and the issuer) will also consider the type and location of the investor when allocating.
Allocation amounts are communicated through the sales or client coverage teams of the bookrunners. The Bookrunner & Dealer (“B&D”) will issue trade confirmations and 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 during the issuance process becomes a Free-for-Trade in the secondary market. The view that the new Eurobond may be priced too low or too high in the primary market is the main trigger to participate for 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. A buyer, on the other hand, is speculating that the bond will trade up in price once launched in the secondary market.
Although the grey market can be defined, it must be said that it is represented by limited activity.
What is Free-for-Trade?
Once a Eurobond is priced and allocated to all the investors who subscribed, the bond becomes available to actively trade in the secondary market. This is generally referred to as “Free-for-Trade” or “FFT”.
Market-makers will only provide active buy and sell prices from moment a new Eurobond becomes "Free-for-Trade".
What is the difference between a primary and secondary market?
As the name states, the primary market is the first time details of Eurobond is introduced to the bond market. This is usually done through an auction to which bond investors can subscribe.
Once the bond has been launched, the bond can be actively traded between buyers and sellers in what is called the secondary market. The secondary market includes all market participants and active buy and sell prices are provided.