A medium term note (MTN) is a debt note that usually matures (is paid back) in 5–10 years, but the term may be less than one year or as long as 50 years. They can be issued on a fixed or floating coupon basis. Floating rate medium term notes can be as simple as paying the holder a coupon linked to Euribor +/- basis points or can be more complex structured notes linked, for example, to swap rates, treasuries, indices, etc. When they are issued to investors outside the USA, they are called “Euro Medium Term Notes”. Issuance of MTNs to investors based in the USA requires a separate US MTN program.

Despite the growing number of people actively participating in the private placement and bank instrument business, there are very few that truly understand what a medium term note is.  Though this amuses us to some degree, it also has alarmed us enough to take action.  Since the “MTN” (medium term note) is a major reason the private placement business exists, we felt like it would be a good idea to connect the dots for our readers with less experience.

By definition, Medium Term Notes (MTN’s) are debt instruments which are created by banks and sold to investors, having a predefined face value, date of maturity, and annual interest rate.

For example, you may have a 10 year note issued from Barclays Bank worth 100M, collecting a coupon (interest) of 6.5% per year.  Each year you would receive 6.5M until the date of its maturity, where you may cash it in for its full face value.

Though an MTN has similar characteristics to other debt notes, it is completely unique due to its flexibility, price, resale potential, and ability to be purchased at a discount from face. Now that you know what a medium term note is, let’s see why they have become so popular recently.

Educational Facts:

35 down to 28 = Fresh Cut
65 down to 55 = Slightly Seasoned
85 down to 75 = Freshly Seasoned

Over 50 years ago, when medium term notes (MTN) started to become available, there were very few passive investments which could compete with the benefits of owning a bank instrument. Given the high annual interest rate, possible discount from face value, and solid backing by top 25 banks, many flocked toward those who issued and owned the notes, looking for ways to financially capitalize.   Once the idea of “trading bank instruments” caught on in the secondary market, the private placement business grew steadily, until the entire business changed with the introduction of the internet.

With the explosion of the internet, the secondary market has been flooded with tons of new brokers trying to broker buy/sells of medium term notes, and bank guarantees. Though it may be possible to close a bank instrument deal, it takes an act of god to do so. The real discussions about bank instruments, at least for those who are successful, revolve around private placement programs.

Bank instruments, such as medium term notes and bank guarantees, are the lifeblood to any private placement program.  Since these notes can be purchased at a discount from top banks, traders can earn quite a hefty profit, all while being risk free due to a prior contractual obligation they had with an “exit buyer”.

As we all know, an “exit buyer” is the entity which purchases the MTN/BG at a slightly higher value, but still discounted from face. Once the first exit buyer purchases the note from the trader, the process repeats itself several times until a final buyer purchases it to hold until maturity. By that time, the note has a very small discount (ex. 93% of face), but many conservative buyers are happy with the remaining spread and annual interest.

MTN’s can be issued with a fixed maturity date (noncallable) or can be issued with embedded call or put options and triggers where the notes will redeem early based on certain parameters. MTNs are most commonly issued as senior, unsecured debt of investment grade credit rated entities which have fixed rates. MTNs offer more flexibility to the issuer and investor both in terms of structure and documentation. [edit] Medium Term Note Program The note are usually connected to a medium term note program, which is a funding program used by issuers to receive bond debt funding on a regular and continuous basis. Their programs can include more than one issuer although the issues are independent up to a maximum amount authorised. The advantage to issuers is that they are not required to produce a full suite of legal documents each time they want to issue notes. Instead, a series of underlying documents are amended with each issue by a pricing supplement / final terms which sets out the terms of each specific issue of notes. This makes access to debt funding easier and cheaper. Programs are registered in a supervisory authority such as the London Stock Exchange and the Luxembourg Stock Exchange. Most large companies have established Medium Term Note Programs to finance their medium term financing needs. Countries also use these programs to access the capital markets.

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