How Private Medium Term Note Offerings Are Regulated And Governed

Depending on how active corporations are in the MTN market, the Federal Reserve will survey these programs. Being that these corporations provide data of the confidential nature, it is their responsibility to show the amount of MTNs they issue with monthly, quarterly or annual reporting. At year end, all MTN issuers are asked to provide date with regards to their ‘outstandings’. The Federal Reserve obtains information on new programs on new programs from the announcements of SEC Rule 415 registrations as well as their contacts from MTN agents. The data on ‘outstandings’ began being collected in 1989 while the data on gross issuance began in January 1983.

With a 100% participation rate, an accurate measure of MTN financing volume by U.S. corporations is able to be analyzed. Notwithstanding, while the U.S. corporate sector is the largest segment of the MTN market, MTNs are issued in other markets as well as by non-U.S. corporations. As an example, several U.S. corporations have issued MTNs in the Euro-market. This participation rate does not include MTNs issued in the U.S. public market by government-sponsored agencies, such as the Federal National Mortgage Association, by supra-national institutions, and by non-U.S. corporations.

Being that these securities are exempt from SEC registrations, while the database includes MTNs issued by bank holding companies, it does not include deposit notes and bank notes offered by banks. More importantly, the database does not include privately placed MTNs. The private placement market is particularly attractive to issuers who wish to gain access to U.S. investors without having to obtain SEC approval for a public offering. According to MTN agents, non-U.S. corporations are the largest borrowers in the market for privately placed MTNs because the financing costs are usually lower in the public market than in the less liquid private market. This transcends into most U.S. corporations choosing to issue public, SEC-registered MTNs though with recent events, there appears to be a shift in the norm.

Issuers Industry and Issuance Volume
In the financial sector, major borrowers who participate within the MTN markets are auto finance companies, bank holding companies, business and consumer credit institutions, and securities brokers. In the nonfinancial sector, participants in the MTN market include utilities, telephone companies, manufacturers, service firms, and wholesalers and retailers. While it is safe to say that this is not the composite group as a whole, predominantly, these industries are what are involved with these MTNs.

Financial firms tend to issue MTNs with maturities matched to the maturity of loans made to their customers since maturities on MTNs reflect the financing needs of the borrowers. Consequently, in the financial sector, maturities are concentrated in a range of one to five years, with only a small proportion are longer than ten years. Maturities on MTNs issued by nonfinancial corporations cover a wider range as a result of often allocating MTN usage towards financing long-lived assets.

The MTNs Market Relative Size
One measure of the size of the market is the ratio of outstanding MTNs to the amount of outstanding public debt (MTNs plus public corporate bonds). As the MTN market accounts for a significant share of borrowing by U.S. corporations, MTNs represent an increasingly important source of credit to non-financial corporations, as these companies have shifted funding from alternative credit markets. In general, nonfinancial corporations that borrow in the MTN market have access to other major credit markets: corporate bonds, commercial paper, bank loans, and privately placed bonds. The shift to long-term financing (MTNs and bonds) over this period is a typical, cyclical phenomenon that occurs in periods of slow economic growth and falling long-term interest rates. However, some of the growth of the MTN market reflects a secular decline in the role of banks as financial intermediaries.

An alternative measure of the size of the market is the volume of investment-grade MTN issuance as a percentage of total investment-grade debt issuance (MTNs plus underwritten straight bonds). This ratio of debt issuance may overestimate the size of the MTN market because MTNs typically have shorter maturities than corporate bonds.