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«In order to assist with the implementation of Real Time Trade Matching and related functions, DTCC and TBMA staff are working together to find new ...»

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Syndicate Information Services The syndicate members can utilize commercial systems that were set up to ease the underwriting process. The two main service offerings are Dealogic (previously known as Commscan) and i-Deal. Both of these systems cover many aspects of managing the syndicate process, from book-running (and book sharing) to recording underwriting amounts and calculating fees. These systems are also utilized for intra-syndicate communications such as sending syndicate invitations, pricing wires, orders, allotments, and other syndicate information. These systems also provide mechanics to distribute issue-related documentation electronically.

Rating Agencies and Credit Enhancers As a basic indicator of credit risk, ratings are an important point of information to underwriters and investors alike. For underwriters, an issue’s rating influences pricing decisions on a new issue. Therefore, an issue’s rating (or lack of a rating) may well have the single greatest impact on the interest cost.

The major rating agencies for corporate bonds are Standard and Poor’s, Moody’s Investor Services and Fitch. The ratings that these agencies assign reflect the agencies current opinion as to the credit worthiness of the issuer; that is the willingness and ability of the issuer to make timely interest payments according to schedule, and meet its debt service requirements as outlined in the bond indenture. To accurately rate a corporate bond, an agency will review the corporation’s financial statement in order to gain a general sense of the corporation’s soundness. Periodically, a rating agency may adjust an issue’s rating in accord with a change within the issuing company.

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In some instances bonds may not be rated. In this case, the bond would carry the letters “NR” for “not rated”. A “NR” bond does not necessarily mean that the issue has a high credit risk or that it would be rated at less than an investment grade rating. However, an issuer that has the potential to receive a high or moderate investment grade rating will often apply for a rating since the issuer may save a significant amount of money in interest payments by obtaining the credit rating. In general, a bond issue with a lower credit rating would need to offer a higher interest rate in order to attract investors. The higher interest rate compensates investors for the greater risk associated with investment in a lower rated issue as compared with investment in a higher rated bond issue.

In order to improve the attractiveness of its bonds and the issue’s credit rating, a corporation may purchase bond insurance or institute several features that enhance either its creditworthiness or the appeal of the security itself.

Bond insurance “guarantees” an investor timely receipt of principal and interest payments in the event of the issuer’s default, but does not insure against fluctuation in market value.

IV. Corporate Bond Underwriting Process

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When a corporation decides that it needs to raise capital through a bond offering, it retains an investment banker to underwrite the bonds. This securities firm or bank is called the Lead Manager or Managing Underwriter. The investment bankers of the managing underwriting firm work with the issuer, the issuer’s counsel and the underwriter’s counsel to develop the structure and price of the bond issue. The issue structure consists of information such as the bond’s maturity and the coupon it will pay.

The bond will be priced after gauging investor interest in the deal and adjusting the yield so that it is attractive for both the issuer and the investor.

Due Diligence While the issue details are being planned by the issuer and the underwriter, a due diligence process takes place. In doing the due diligence, the underwriter’s counsel investigates the issuer to ensure that the prospectus is complete and accurate. In a Due Diligence Meeting held with the issuer, issuer’s counsel, lead underwriter, and underwriter’s counsel, the terms of the final agreement are reviewed. The participants

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Registration with the SEC The issuer files a Registration Statement with the SEC2. The SEC has a provision for shelf offerings, where an issuer may register a new debt security without selling the entire issue at once. The issuer can sell portions of the issue over a two-year period without reregistering the security or incurring penalties. The corporation must still file the required annual and quarterly reports to the SEC. With a registration “on the shelf” the corporation may go to market very quickly when market conditions become favorable. “On the shelf” registration significantly shortens the time period required to underwrite a new issue and I one of the key differences in corporate underwriting. Currently, there is no “on the shelf” registration option in the municipal underwriting process.

Red Herring The issuer prepares a preliminary official statement known as a Red Herring or Prospectus with the help of the issuer’s counsel. The Red Herring includes information about the issuer, such as what the issuing corporation does and historical financial information. The Red Herring also includes a brief section on the underwriting itself, describing the structure of the offering.

The Red Herring is sent to the underwriter’s counsel for legal review. After reviewing the document, the underwriter’s counsel sends it to the investment bankers (at the managing underwriter) for review; who then forward it to the capital markets desk or the syndicate operations group for proofing of the style. Each underwriting firm has a unique style in which the prospectus is printed.

The issuer may want to choose a printer for printing (and in some cases, distributing) the Red Herring. The Red Herring is then distributed to potentially interested investors. Each underwriting firm maintains distribution lists for different types of offerings to match potential client interest. The underwriting firm may e-mail a pdf copy of the Red Herring to clients, provided that the email delivery adheres to the SEC guidelines regarding notification and consent. Sometimes an underwriting firm may outsource the distribution responsibility to a vendor such as ADP or i-Deal Prospectus. Final prospectuses are delivered to investors in hardcopy.

Underwriting Syndicate The lead manager invites other investment banking firms to participate in the deal as members of an underwriting syndicate. This may happen via a wire that is sent through Dealogic or via an email message sent through an electronic (web based) syndicate platform such as I-Deal. Going forward, the lead manager and syndicate members communicate through the electronic syndicate platforms or wire services. A Telex machine may also be used for communication among the syndicate members, particularly on some international deals.

If the new issue security is classified as exempt, then a SEC registration is not required.

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The issue is considered to have been “launched” or “announced” as the syndicate invitations have been sent.

Syndicate members accept the invitation and notify the managing underwriter of any exceptions or conditions via the e-syndicate platform or wire service. The lead manager’s master Agreement Among Underwriters (AAU) needs to be signed by each syndicate member, and the syndicate members are then bound by it. Selling group members however, do not sign nor are bound by the AAU. The selling group simply, as the name implies, assist in selling the securities to institutional (or retail) clients. The selling group does not have any financial liability in the underwriting process. Instead of signing an AAU, the group signs a Selected Dealer Agreement or a Selling Group Agreement which dictates that the selling group member may acquire new issue securities from the underwriting syndicate at a discount.

The order period begins when the deal launches. During the order period, the underwriter’s sales force markets the issue and accepts “Indications of Interest” known as IOIs from clients. IOIs are considered preliminary orders since the price of the security has not been established.

After the deal has been launched and all the details about the issue structure are known, the managing underwriter applies for the CUSIP number and/or the ISIN number. (Some lead managers may apply for the CUSIP number as soon as the Red Herring is available.) The lead manager has the option to apply for the CUSIP number through the CUSIP Service Bureau’s web interface at www.cusip.com or by emailing or faxing the request to the CUSIP Service Bureau with the appropriate documentation. Listed on the request form are several types of securities and the corresponding types of documentation that CUSIP requires in order to process the request. The CUSIP Service Bureau will not process a request for a CUSIP number until the supporting documentation is sent via email or fax. In order to encourage underwriters to submit requests via the internet-based system, the CUSIP Service Bureau offers a 10% discount off the processing cost. One of the benefits of sending a request for CUSIP numbers electronically is that underwriters can check on the status of the CUSIP in real-time. After the CUSIP Service Bureau processes the underwriter’s request, it sends the CUSIP numbers via both email and fax back to the lead manager’s Operations Department. The CUSIP number is then used to identify the issue in communications between parties. This is the first time in the process where information is solicited from an outside participant. The lead manager has an obligation to give the final offering details (such as the pricing information) to the CUSIP Service Bureau, which is usually done by distributing the final prospectus as it becomes

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There are some new issue securities that are exempt from registering with the SEC. These securities are known as “restricted” or “non-registered” securities, such as 144A securities. For these non-registered securities the lead underwriter submits an application for NASD’s PORTAL (Private Offerings and Restricted Transfers through Automated Linkages) symbol, which is needed for DTC eligibility of non-investment grade securities. The application may be faxed or emailed to NASD, along with any offering documentation. NASD notifies DTC with a letter stating that a particular issue has obtained the PORTAL symbol and may now become DTC eligible.

Pricing After the deal has been launched and preliminary orders are being accepted, the lead manager’s capital markets desk begins the process of pricing the issue with the issuer and respective counsels. The pricing process continues over the course of the underwriting process until all preparatory actions are completed, after which time a final price is established. The managing underwriter then determines the appropriate allotments to the underwriting group and the customer orders are executed.

During the pricing process, the lead manager emails the terms of the deal, i.e. all the descriptive data (which include preliminary pricing information), to Bloomberg and other information service providers. This is important in preparation for the beginning of the secondary market trading in the new security. If the issue is exchange listed, data is also distributed (typically via fax) to the exchange so that the new issue information can be entered in the internal systems of the exchange.

A registration letter is sent to the trustee by the lead manager. The purpose of this letter is to inform the trustee of the terms of the issue. This information is typically submitted electronically, unless a page has a signature. In such a case, the page with the signature is faxed to the trustee. The trustee is the financial institution that acts in a fiduciary capacity for the benefit of the bondholders in enforcing the terms of the issue.

After the registration letter is sent to the trustee, the underwriters and the issuer together finalize pricing. As soon as the final price for the issue is established, the preliminary orders (previously IOIs) are executed and the trade occurs.

The following steps happen simultaneously immediately following the initial pricing of

the issue:

TRACE Descriptive and preliminary pricing information regarding the new issue is submitted to TRACE. The secondary, over the counter market trades of corporate bonds are reported to the NASD through its Trade Reporting and Compliance Engine (TRACE) for regulatory and surveillance purposes. TRACE was created to improve transparency in the corporate bond markets, and most U.S. dollar-denominated bonds fall within the TRACE Corporate Bond Operational Underwriting Process 15 Business Practices in “Plain English” December 9, 2004 eligibility, whether the issuer is domestic or a foreign corporation. The public TRACE web site displays the bond transaction’s execution time and date, quantity, price and yield. Currently this free of charge information is publicly displayed on a 4-hour delay.

TRACE information is also redistributed by information vendors who may enhance the data to add value to their customers.

TRACE requires the new issue information before 5:00 p.m. the day before secondary trading in the new issue begins so that the TRACE operations center may set up this information in its system. The managing underwriter contacts TRACE in writing, either via email of fax. A common practice is to send a pricing sheet via fax. The information to be submitted should include CUSIP numbers, issuer’s name, coupon rate, maturity, brief description of the issue and whether the issue is a private placement issued pursuant to Rule 144A. Also required is information that will help NASD to determine if the issue is subject to dissemination, i.e. ratings and the original issue size. Under NASD Rule 6260, managing underwriters are required to make a good faith determination that the security is TRACE eligible before submitting information, however, TRACE eligibility is determined by NASD, accordingly, unless a security is clearly ineligible (e.g. a municipal bond), the information should be submitted to TRACE.

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