credit spread / coupon of a new bond issue
Hi all,
I have been wondering for a while now how you estimate the credit spread / coupon of a new bond issue in case you have got few comps, ie no other issuers and old bonds have shorter maturity. I assumed you would take the z spread of the current issue and add some bps to compensate for the longer maturity of the new issue.
Any thoughts or do you know whats market practice ?
Swasi
Don't know if this is exactly what you are asking, but if it is a primary issue; based off of ratings, wouldn't the spread just be based on the initial demand?
well I think IBs are going out with a yield range, ie they will have a certain figure for coupon/spread in mind when issuing a bond.
The way you figure out coupon is just by actual cost of money in the marketplace. If there are no reasonable comps, you'd have to evaluate the issuers credit. See where they're rated, and where other issuers with similar ratings are financing at. To determine spread you need to know where your respective yield curve is at, and then you would look at a range of previous transactions and subtract the two. I'm on a credit desk, and this what we do.
OK thanks. But not sure what you mean by i) actual cost of money in market place is and ii) what respective yield curve are you referring to?
I thought a short way would be to get the zspread and add the yield of the Dollar curve with respective maturity.
bingo.
also how would there be no reasonable comps? like none in that industry, or is it a nontraditional credit structure? I have a hard time believing there are no bonds with the maturity yours has plus a credit rating somewhere in the ballpark.
by bingo you mean zspread plus yield of the Dollar curve with respective maturity would be a short way aof doing it ? well there are comps but mostly within a different industry if I sort by same rating and maturity. Otherwise within the same industry comps are at different maturity.
What the OP is referring to is something similiar to this.
Northern Trust Corp. (NTRS: A2/A+/AA-; S/S/S) is in the market this morning with $350 million of an uncommon structure for a U.S. bank, 15NC10 Subordinated Notes, with IPT +130a bps. At the IPT, we do not like this deal, in our opinion it is ~20 bps too tight. When we saw the structure, we were optimistic that the deal would price cheap, similar to the history of the TLAC deals each time a new twist to the structure was introduced. But this does NOT appear to be the case here. NTRS and its T&C banks are highly regarded and trade tight across the curve relative to spread lending banks, but this structure deserves a relatively large new issue concession, in our opinion, to account for the difficulty to comp the deal and option granted to the issuer.
This structure is unique for large regional US banks, but has been used by non-US banks and insurance companies. The best comp, in our opinion, is the TD 3.625% Subordinated Notes due 2031 (callable 2026), which last traded +145 bps. While this level is wider than the IPT for today’s NTRS, it is not really apples-to-apples given the Non-Viability Contingent Capital clause inherent in Canadian bank offerings. But to build a curve for TD, we see the 2.50% Notes due 2022 trading +53 bps. If we use a 35-40 bps 5-10 curve that we currently observe for US universal banks, that would bring a 10 year USD issue for TD to ~90-95 bps, or a ~50 bps pickup to move from senior to 15NC10 subordinated. MFCCN 4.061% Subordinated Notes due 2032 (callable 2027) issued earlier this year are currently +160 bps, which compares to MFCCN 4.15% Senior Notes due 2026 at +110 bps, so also ~50 bps to move from senior to 15NC10 sub. Our last comp is WSTP 4.332% Subordinated Notes due 2031 (callable 2026), now +175 bps vs. WSTP 3.35% Senior Notes due 2027 at +110 bps, so even a little wider here,+65 bps to move from senior to 15NC10 subs.
If we view 50-65 bps to move from senior to 15NC10 sub as the right spread, we next look at other NTRS debt. Of course, the bank can’t make it easy by having an on the run 10 year, but there is a 2.375% Senior Notes due 2022 that doesn’t trade often but last quoted +60 bps. Building out a curve similar to TD, we estimate a 10 year NTRS would trade ~100 bps, which would bring fair value for a 15NC10 sub to 150-165 bps. As a further check, the NTRS 3.95% Subordinated Notes due 2025 last traded +80 bps, which calculates to a G+90 bps. Extending that maturity by two years we estimate Subordinated Notes due 2027 would be priced ~110 bps, although using a subordinated/senior debt ratio of 1.25x (similar to WFC) we would calculate fair value somewhat wider, +125 bps. To move from 10 year bullet subs to 15NC10, we believe the issuer has to pay a premium for the option. Any way we look at it, we struggle to come up with fair value for this 15NC10 inside +150 bps for NTRS.
something like this but not sure how they "build a curve for TD"
Math behind setting a corporate bond coupon. (Originally Posted: 11/30/2016)
Can anyone explain the math used by analysts to set a coupon for a corporate bond? Specifically for high yield issuers?
What do you mean by "set a coupon?"
Are you asking why one issuer might pay 5.375% while another pays 6.875%?
I mean when an investment banking team is trying to raise capital for a high yield company, what metrics do they use to determine what coupon to try and bring the deal at. Is it some multiple of ebitda/interest expense? Whats the math behind whether they try and launch the deal at 8%, 9% etc. ? I understand if AAPL wanted to bring a 10yr corporate they would pay less than a company with weaker credit metrics. I just wanted to know what ratios bankers/analysts use and how they derive at the coupon. Thanks
Estimating the coupon rate for a bond issuance three years from now (Originally Posted: 02/28/2014)
I am planning to:
1) Look up the company's credit rating 2) Use the rating to find the current yield spread for similar (rating/maturity) bonds 3) Look up the relevant Treasury forward rate for three years from now 4) Add the yield spread to the Treasury forward rate
Will this work or is there a better way to do it?
Can you describe how you are looking to apply this calculation? Technically that sounds right (full disclosure I do not have a deep background in fixed income products) but the methodology could be different based on how you are looking to utilize the information?
I am building a model which assumes a bond refinancing in three years so just trying to get a rough estimate for what rates will be for the issue at that time.
Sounds about right, although you might wanna refine your selection of the comps, i.e. rely on not just the rating... In light of that, you could just take an existing bond curve for the appropriately rated group of issuers in the same industry and compute the sought fwd rate directly from that.
Whichever way you go, be aware of the inclusion of the various risk premia in your calc.
Quaerat consequatur aut impedit earum distinctio eligendi consequatur. Dolorem est doloribus itaque fugit aut harum. Qui nostrum tempore quasi culpa illo incidunt itaque nostrum.
Aut animi sed quasi voluptas cum sit. Dolore sit necessitatibus aut aut quia. Quia molestiae animi eius sint. Est vel atque ut recusandae voluptas alias.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...