A Medium Term Note (MTN) is a debt note that usually matures between 5-10 years. A corporate MTN can be continuously offered by a company to investors through a dealer with the investors being able to choose from differing maturities. The coupon rate on an MTN will be higher than those achieved on short-term notes.
MTNs, just like any other debt instruments, will have a predefined Face value, Maturity date and annual interest rate. However, it is unique due to its flexibility, price resale potential, and ability to be purchased at a discount from its Face value.
The major difference between Medium term notes and corporate bonds is the way they are issued in the market. MTNs are usually offered to investors by the issuer’s agent instead of being underwritten by an Investment bank, and then sold to the public at a go.
The benefits of issuing MTNs over Bonds
Medium Term Notes offer both issuers and investors flexibility in terms of its structure and documentation. MTNs can match MTN terms with liabilities of the issuer; thus, MTNs are effective tools of asset-liability management for both the issuer and the buyer.
MTNs can have floating or fixed rates or formulas that tie return to equity, commodity, or currency prices. They can have calls, puts, and other options built into them. They can also be issued as zero coupons, step-up or step-down coupons, inverse floating rates, or based on an index. Interest payments can be monthly, quarterly, or semi-annually.
The flexibility of MTNs also allows the issuer to take advantage of temporary market opportunities, since a new MTN with specific characteristics can be issued quickly. An investor can make a reverse inquiry to an organization that wants to issue Medium Term Notes, by requesting for specific characteristics that is not currently offered in the market.
MTNs also allow discreet funding, since only the issuer, agent, and investors need to know about a transaction. This will be of benefit to a company which might be in financial distress.
In 2011, UBA issued a 7 year N400bn Medium Term Notes Programme in Series. The essence of the issuance was to channel the proceeds of these funds towards its retail and infrastructure loan growth and expansion of new distribution channels (e-banking platforms) in Nigeria.
An opportunity for early redemption was given as part of the terms and conditions of this offer. Investors could redeem the Notes in parts or fully at any time 5 years after the issue date at a redemption price equal to 100% of their principal amount plus accrued but unpaid interest on the date of redemption. This could be done after providing a prior notice of no more than 60 nor less than 30 days to the note holders.
Last month, the Management of Flour Mills of Nigeria, revealed plans to raise N70 billion through Medium Term Notes.