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Tuesday, December 16, 2008

The Anatomy of the Medium Term Note (MTN) Market

Over a decade ago as well as a strong current presence, medium-term notes (MTNs) have emerged as a major source of funding for U.S. and foreign corporations, federal agencies, supranational institutions, and sovereign countries. MTN's have been around since the early 1970's. At that time, the market was established as an alternative to short-term financing in the commercial paper market and long-term borrowing in the bond market; thus the name "medium term." Through the 1970s, however, only a few corporations issued MTNs, and by 1981, outstandings amounted to only about $800 million. In the 1980s, the U.S. MTN market evolved from a relatively obscure niche market dominated by the auto finance companies into a major source of debt financing for several hundred large corporations. In the 1990s, the U.S. market continued to attract a diversity of new borrowers. Outside the United States, the EuroMTN market has grown at a phenomenal rate. Currently, outstanding MTNs in domestic and international markets stand over $1 trillion dollars (Sources. Merrill Lynch & Co., Websters Communications International, Federal Reserve Board).

Most MTNs are noncallable, unsecured, senior debt securities with fixed
coupon rates and investment-grade credit ratings. In these features, MTNs are similar to investment-grade corporate bonds. However, they generally differ from bonds in their primary distribution process. MTNs have traditionally been sold on a best-efforts basis by investment banks and other broker-dealers acting as agents. In contrast to an underwriter in the conventional bond market, an agent in the MTN market has no obligation to underwrite MTNs for the issuer, and the issuer is not guaranteed funds. Also, unlike corporate bonds, which are typically sold in large, discrete offerings, MTNs are usually sold in relatively small amounts either on a continuous or on an intermittent basis. Read More>>