Issuers offer and price bonds and allocate them to investors
Although issuers can technically sell bonds to the public, they often hire one or several dealers, known as lead managers, to help with the bond issuance process. Dealers are knowledgeable in debt capital markets and well-connected with various institutional and retail investors.
To mitigate risk and to reach a broad group of potential investors, lead managers usually invite other dealers to join the deal. Those who accept the invite will become part of the syndicate. Once the syndicate has been formed, the deal is considered launched. It is not uncommon that the syndicate will further utilize a selling group of dealers and brokerage firms to market/sell bonds to investors.
The issuer then sits with the lead managers to negotiate the terms of the deal. Major items such as amount of money the issuer wants to raise, type of deal (i.e. underwritten vs. agency) type of debt (e.g. secured vs. unsecured), bond tenors (e.g. 5 year vs. 10 year, or multiple tenors) and use of proceeds will be discussed in details. Once terms are finalized, a term sheet will be put together by the lead managers. An underwriting agreement will also be signed between issuer and the syndicate.
Lawyers, auditors, and dealers perform due diligence on various aspects (e.g. operations, financial, tax) of the issuer to ensure that their registration statements are accurate. Due diligence includes reviewing key documents such as historical financial statements and contractual agreements as well as performing industry research. The process is concluded with a bring-down call/meeting, where lawyers, auditors, dealers, and sometimes a technical committee (often used in technical industries like mining) will ask the issuer questions to confirm the results of the due diligence investigations.
Provided that no material risk is found in the due diligence process, lead managers, with the help of lawyers, will draft a preliminary prospectus to be filed with regulators. The prospectus provides all relevant information for investors with the exception of bond price, coupon, and principal amount, as these factors are not yet determined.
While the prospectus is being reviewed by regulators to ensure all material information has been fully disclosed, bookrunners help the issuer build interest from investors - this is known as “book building”. Typically, as part of the book building process, dealers accompany the issuer on a roadshow, where the issuer will market the bond to investors.
After the marketing period ends, the new issue is launched. On the launch date, the bookrunners work with investors and the issuer to set the principal amount and credit spread or coupon rate for the bond based on factors including demand for the bond by investors, current market conditions, and issuer specific considerations.
Following pricing and allocation of a new issue, the offering document is signed and filed and the deal is closed. Settlement agents transfer the proceeds to the issuer and investors receive the bonds. Typically, corporate bonds settle three days following the issue date. Following settlement, the bonds will be listed and can then be traded in the secondary market by investors.