The Flow of a Bond Issuance - Part 2 - Primary Level - Primary Trading Process and Procedures

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Once all the documentation have been perfected, the bonds will be ready to be sold for the first time. This is similar to the IPO stage in the equities market.

However, there are three methods to which the bonds can be sold. Depending on the needs of the issuer, these three methods have their own peculiar advantage and disadvantages. As shown in the diagram below, the three options are tender, bought deal and book building.

Tender Method (Option 1)

•There are 3 ways through which a new bond or sukuk issue can be distributed to the market. The first is the tender method, which is usually used for Government securities. Highly rated corporates sometimes utilise this option. The tendering process is open to all Principal Dealers. In the case of GIIs, all Islamic banks are also allowed to participate in the auction. Principal Dealers are obliged to tender competitively for a minimum of 10% of the issue amount. Bids submitted during the auction may be based on either price or yield. The tender announcement detailing the size and exact date of the issue is announced at least 5 business days before the issue date, via FAST. The “when issued” (“WI”) trading will commence on the tender-announcement date, after stock creation through FAST. WI trading begins upon formal announcement of an issue. WI trading is done on a yield basis, regardless of whether it is a new or reopened issue; it will continue until the tender results are announced. The value date for settlement of WI trades must be on or after this date; the standard value date is 2 business days (value spot). Trading on a WI basis is aimed at facilitating the price-discovery process. 

 

•Non-Principal Dealers or other inter-bank institutions can also submit their bids via a Principal Dealer, with a maximum allotment limit of 30% per bidder. If bids are successful, RENTAS will allot the securities to the bidder by lodging these securities with their appointed Authorised Depository Institutions (“ADIs”). Settlement will then take place automatically in RENTAS, on a Delivery-versus-Payment (“DvP”) basis.

 

 

Bought-Deal Basis (Option 2)

 

• This is the most typical issuance process for corporate bonds or sukuks. This method overcomes some of the major risks associated with the tender method, one of which is the risk of under-subscription. Demand for sukuks is a function of credit appetite as well as the economic environment at the point of issuance. As such, the likelihood of under-subscription is there. Although such risk can be mitigated by having an underwriter  (or underwriters), the upfront costs and additional administrative processes (e.g. documentation), not to mention having another external party involved in the issuance process, may not appeal to some corporate investors. 

 

• The tendered yields could  also be substantially above what had been originally expected. Due to the time required from structuring up to the point of offering the sukuks during the tender period, the risk-reward appetite of potential investors may have moved against the issuer. In this case, the original cost projections for the sukuk may become inadequate. Similar to the under-subscription situation discussed earlier, an underwriter (or underwriters) may be employed to provide a floor price (i.e. a ceiling yield) for the paper. 

 

Book-Building Basis (Option 3)
 

•This is somewhat similar to the tender method, except  that it is done on an informal basis. Via private arrangements with a number of identified potential investors, a list of final investors will be built based on the individual one-to-one negotiations. After a given period for tender, the Facility Agent or Lead Arranger will announce the allocation based on the bidding results.