Medium-Term Notes

The medium-term notes continuously issue debt securities, with maturities usually 5 to 10 years. Unlike bonds published once, MTN is printed and constantly sold by a dealer or various dealers over some time. MTNs are transacted on a medium-term note brokerage and not on an exchange. An investment bank that acts as a dealer sells the notes to the investors on a best efforts basis, and there is no obligation on the dealer to sell a specified amount or the whole of the notes on behalf of the issuer.

• Medium-term notes target large institutional investors and high-net-worth individuals, unlike bonds issued to the masses on the open market. In addition, the medium-term notes can be callable, which means the issuer can repay the outstanding amount to the investors after a specified amount of time, as mentioned in the prospectus and related documents released at the time of the issuance.
• An issuer needs to generate unique identifiers for the notes issued in a medium-term note program. These identifiers can be International Securities Identification Number (ISIN) or Committee on Uniform Security Identification Procedures (CUSIP), depending on the market it is issued in.

Key Takeaways                                                               

• Medium-term notes (MTNs) are debt securities with maturities typically ranging from 5 to 10 years. Unlike bonds, which are issued once, MTNs are continuously sold by one or more dealers over some time.
• MTNs are traded on a medium-term note brokerage rather than an exchange.
• MTNs are targeted at large institutional investors and high-net-worth individuals, unlike bonds issued to the general public on the open market.
• There are two types of MTNs: U.S. medium-term notes and Euro medium-term notes.

Depending on the location of the issue of the notes, these are either U.S. medium-term notes or Euro medium-term notes.

#1 - U.S. Medium-Term Notes

The medium-term notes issued to investors in the United States are called U.S. medium-term notes. These are given and traded in the United States and must be administered via a U.S. Medium-Term Note Program. In addition, the issuer must file a shelf registration of $100 million to $1 billion worth of securities with the U.S. Securities and Exchange Commission.

Once the SEC approves the initial application, the issuer files the prospectus describing the medium-term note. The prospectus has all the broad-level information regarding the note issuance. It also has information regarding all the investment banks selling these notes. The investment banks charge an underwriting fee for formulating structured products based on the note’s issuance.

Example

On 18th July 2019, the medium-term note for $50,000,000 was issued by The Federal Home Loan Mortgage Corporation (Freddie Mac). The notes bear a fixed interest payment of 2.25% and mature in Jan 2022. The denomination for the notes is $1,000 per note and increments thereof. The first interest payment date is 18th Jan 2020. Underwriters for the notes are Jefferies & Co. Inc., Wells Fargo Securities LLC, and BNY Mellon Capital Markets LLC.

As per the pricing supplement of the notes, the notes are callable after the first interest payment date. The notes bear a fixed coupon that one will pay semi-annually every 18th Jan and 18th of July.

Since the notes are issued in the United States for the investors, this is a U.S. medium-term note.

#2 - Euro Medium-Term Notes

When the notes are issued and traded outside the United States and Canada, the notes are called Euro medium-term notes. Issuers can easily enter foreign markets to gain capital via the issuance of Euro medium-term notes. The Euro medium-term notes allow issuers to access many markets and currencies. Euro medium-term notes are issued continuously with varying maturities like U.S. medium-term notes.

Example

Telefónica Emisiones, S.A.U. a Spanish telecommunication provider issued notes worth €40,000,000,000. These notes were to be issued in series. Each series would have one or more tranches of issuance. The interest rate on these notes will either be fixed or floating, further specified in the final terms of the note issuance. The notes are callable after a specified period depending on the issuance document.

The dealers involved in the note issuance are BNP Paribas, Banco Bilbao Vizcaya Argentaria, S.A., Banco Santander, S.A., Barclays Bank PLC, Merrill Lynch International, BofA Securities Europe S.A., Deutsche Bank AG, UBS Europe S.E., Commerzbank Aktiengesellschaft, Credit Suisse Securities (Europe) Limited, Goldman Sachs International, HSBC Bank plc, J.P. Morgan Securities plc, Citigroup Global Markets Limited, Mizuho International plc, Morgan Stanley & Co. International plc, NatWest Markets N.V., Société Générale, and UniCredit Bank AG, to name a few.

Since the note is issued outside the United States and Canada, the note is a Euro medium-term note.

• The rate of return on an MTN is higher than on other short-term investments.
• It allows investors to invest in security between the short-term and long-term investment options.
• Medium-term notes are customized securities tailored to meet the issuer’s needs, which help the issuers make more out of the debt issuance at a lower cost.
• It allows the issuer to enter diversified markets and a plethora of structured products.
• The MTN market allows the issuer to raise capital discreetly since the issuer, dealer and investor are the only participants in the primary transaction.

• The cost of servicing medium-term notes is incremental and can offset the savings on interest rate payments.
• Since U.S. medium-term note issuance has stringent documentation, issuers prefer issuing public bonds instead of multiple note issuances.

• Medium-term notes are debt securities sold by a dealer on behalf of an issuer continuously over time, with maturities ranging from 9 months to 30 years.
• Medium-term notes bear interest and have fixed or floating coupon rates linked to an interest rate like Euribor or LIBOR.
• Medium-term notes can also have complex interest rates linked to swap rates or other structured products.