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Medium Term Notes (MTNS)

Medium term notes (MTNS) are a form of corporate debt financing. They first came into existence in the 1970's in the US when the auto finance companies, such as General Motors Acceptance Corporation (GMAC), started issuing debt securities with maturities falling between those of commercial paper and corporate bonds. The aim is to achieve a better asset-liability management (ALM) for their auto loan books. The debt securities required registration with the SEC in a similar way to corporate bonds. However this was quite expensive and time consuming. The auto companies were looking for something less expensive to finance their evolving asset liability management, so the process was streamlined.

The SEC in 1982 Adopted Rule 415 and the medium term market was launched. The market allows issuers to continually offer medium term notes to investors. The medium-term notes  must be registered but this is required only once every two years. During that period the issuer is free to modify the medium term notes nominal yield or term, as the issuers needs or market requires. The process is known as shelf registration and in this way medium term notes resemble commercial paper. However the difference is is that medium term notes are registered with the SEC and often have a coupon attached, unlike commercial paper which is usually issued at a discount.

In the UK there is also a shelf registration system. It allows the issuer listed on the Official List of the UK Listing Authority to produce, on an annual basis a document (shelf document), which contains most of the information required in listing particulars. The shelf document is published on the UK Listing authorities website. If the issuer wishes to issue and list further shares or debt during the 12 month period all that is necessary is the publication and circulation of a short document (issue note) containing the information required to complete the listing particulars and update the shelf document in accordance with the issue. There are similar systems of shelf registration in the U.S, Canada, Japan, France, Spain, Belgium.

There is often substantial cost savings if the shelf document is produced in conjunction with its annual report and accounts, however the document can be produced at any time during the year. The shelf document will remain current until the earliest of.

Before registration the shelf document is approved by the UK Listing Authority before publication and registration.

In most cases an issuer will engage in two or more dealers to offer the medium term notes on a best efforts basis. The issuer through those dealers usually advertises a rate schedule indicating the nominal yields available for various terms up to ten years. The issuer changes its rates depending on market conditions and to its immediate need for funds. At times it may temporarily suspend issuing notes. If an investor is interested interested in purchasing notes at the offered rates, the investor contacts one of the dealers, and the transaction is arranged.

If an invest wants to buy notes for a term or nominal yield not offered, it may place a request through one of the dealers. If the issuer finds the request to its needs it may accept the proposed terms. This process is called reverse inquiry, and it represents a large proportion of medium term issuances.

Medium term notes entail credit risk, therefore they are rated just like corporate bonds. Most of them are rated BBB- or better.

There is also a secondary market for medium term notes which is supported by issuing dealers. If a dealer buys notes held by an investor,  the dealer may hold them in its own inventory or try to sell them.

In medium term notes were first introduced they were issued as senior unsecured debt securities paying a fixed coupon for terms between 270 days and ten years. Today, medium term notes are structured in a variety of different ways. Also the name medium-term note has become a misnomer because the market is defined by shelf registration rather than the instruments terms. Shelf-registered securities have been issued with terms as much as 30 years, and are still called medium term notes. Floating rate medium term notes can also be issued. There are also instruments where the coupons are linked to equity or commodity indexes. Medium term notes can also be securitized which provides additional flexibility.