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The curious structure of an MTN: Difference between revisions
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The neat thing about this kind of note is its transferability: the original lender can “[[negotiability|negotiate]]” it — sell it<ref>Or pledge, or lend it.</ref> without the issuer’s permission, or even knowledge — and its value will be the [[present value]] of the issuer’s promise to pay. A note is a unilateral contract, therefore. A conventional loan is a ''bilateral'' contract, and the job of transferring ones rights and liabilities under it is more involved, and often requires the cooperation of the borrower. | The neat thing about this kind of note is its transferability: the original lender can “[[negotiability|negotiate]]” it — sell it<ref>Or pledge, or lend it.</ref> without the issuer’s permission, or even knowledge — and its value will be the [[present value]] of the issuer’s promise to pay. A note is a unilateral contract, therefore. A conventional loan is a ''bilateral'' contract, and the job of transferring ones rights and liabilities under it is more involved, and often requires the cooperation of the borrower. | ||
Notes therefore are liquid, transferrable things, and while they are outstanding the issuer need not even know who its creditors are | The other neat thing about notes compared to loans is that you can easily divide a big borrowing into lots of little notes, rather than a single big one. Thus, you can access a wider pool of lenders — including Belgian dentists, as we will see — each of whom can manage its own exposure without reference to the others, by buying or selling bonds in the secondary market. | ||
Notes therefore are more liquid, transferrable things, and while they are outstanding the issuer need not even know who its creditors are: they hove into view only upon payment of [[principal]] or [[interest]], when they would show up at the issuer’s office with their instrument in hand. | |||
This all being the case, notes quickly became popular, and the process of issuing, selling and maintaining them industrialised. Notes were “security printed”, like banknotes. [[Interest]] payments were represented by perforated [[Coupon|coupons]] that could be detached and presented (or “stripped” and separately traded): for a long-dated bond, where there wasn’t room for all the coupons, there would be “[[talon]]s” attached entitling the bearer to a fresh strip of coupons. Issuers appointed banks as “[[paying agent]]s” to handle all the messy mechanics of dealing with investors. In some jurisdictions issuers needed to maintain a record of noteholders, so created “registered” notes which were profoundly different in legal ''concept'' — title transferred by entry in the register, whereas with a [[bearer instrument]] the security itself ''was'' the debt and title passed by delivery — and there needed to be terms to deal with certain unwanted contingencies: replacing lost or mutilated notes; provisions for noteholder meetings to consider amendments to terms and so on. | |||
Now an IOU is a simple enough thing: the legal architecture making it all possible was another thing altogether: trust deeds, paying agency agreements, dealer agreements, prospectuses and so on, and the up-front cost of a “standalone” note issue was formidable. Thus emerged the [[medium term note programme]] — a pre-crafted architecture containing all the standard terms, appointments and so on, from which issuers could quickly issue “drawdowns” when they needed to. | |||
In parallel the information revolution arrived and notes started to trade electronically, in a [[clearing system]]. Here noteholders’ interests were represented as electronic entries in their clearing system accounts there was no need for security printing, perforated coupons, a wide network of paying agents, and the identity for the time being of the holders was ascertainable, at least by the clearing system, which had to maintain the records on order to ensure everyone got paid. | |||