Medium Term Notes

Medium Term Notes

Medium term notes were created to fulfill a need. There were long term and short term bonds. The industry within the United States change based on the Auto industry with respect to medium term notes. However, medium term notes were crucial to corporations and banks to issue with their flexibility of the note.

General Motors, the auto company, created the MTN market in the early 1970s as an extension of the commercial paper market, in lieu of the bank European MTN’s or European Medium Term Notes or EMTN’s. To improve their asset-liability management, the auto finance companies needed to issue debt with a maturity that matched that of their auto loans, 5 years, to dealers and consumers. However, underwriting costs made bond offerings with short maturities not worth the time, and maturities on commercial paper cannot exceed 270 days, for MTN’s in the US Market. Therefore, the auto finance companies began to sell MTNs directly to investors, and what began as the investing boom of MTN’s.

In the early seventies, the growth of the market was hindered by illiquidity in the secondary market and by securities regulations requiring approval by SEC of any changes to a registered public offering. With the increased costs of issuance, which hindered borrowers because they HAD to obtain approval by the SEC each and every time they posted their offerings on the screen. To avoid this regulatory hurdle, some corporations sold MTNs in the private placement, secondary, market. This is the market that brokers are trying to “get paid” or do a deal. However, over 99 percent of the deals are bogus!

What is a Medium Term Note?

A medium term note, (MTN) is a debt instrument or note that usually matures in 5–10 years, but the term may be less than one year or as long as 30 years. Medium term notes can be issued with a fixed or floating coupon, with the fixed coupon being in more demand. A floating rate medium term notes can be as simple as paying the holder a coupon linked to Eurobir, Euroclear, with certain basis points. Some of the medium term notes can be “structured” notes linked to treasuries or other indices. When in demand in Europe, they are called “EMTN” or Euro Medium Term Notes and commonly called MTN’s, Medium Term Notes, in the United States. Many of the banks in Europe will refer to them as “Bank Debentures.”

Also, MTNs can be issued with a fixed maturity date, which makes them “non-callable”, or can be issued with triggers where the notes can be redeemed early based on certain parameters. MTNs are most commonly issued as senior, unsecured debt of investment grade credit rated entities which have fixed rates.

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