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Glossary

Bond market: Glossary

Credit Market General Notions


Amortized loan - A loan with scheduled periodic payments that consist of both principal and interest.Balloon loan - A type of loan that does not fully amortize over its term. Since it is not fully amortized, a balloon payment (loan payment that is much larger than the other payments) is required at the end of the term to repay the remaining principal balance of the loan.Bridge loan - A bridge loan is interim financing for an individual or business until permanent or the next stage of financing can be obtained. Money from the new financing is generally used to "take out" (i.e. to pay back) the bridge loan, as well as other capitalization needs. Bridge loans are typically more expensive than conventional financing because of a higher interest rate, points and other costs that are amortized over a shorter period, and various fees and other "sweeteners" (such as equity participation by the lender in some loans). To compensate for the additional risk the lender may require cross-collateralization and a lower loan-to-value ratio. On the other hand they are typically arranged quickly with relatively little documentation.Bullet loan - Type of balloon loan in which only interest is paid for the duration of loan; the principal is paid at the end of the loan as one lump sum payment.Club loan - Loan which is syndicated by the borrower, acting as arranger and agent of its own deal and using its relationship banks. There may be different structures, but documentation will be identical with the different banks.Commercial loans to the constituent entities and municipal formations of the Russian Federation - are loans granted by commercial banks on a maturity, repayment, interest payment and targeted use basis.

Among the constituent entities of the Russian Federation, the recipients of commercial loans are the republics, territories, regions, cities of federal status, as well as autonomous regions and districts, such as the Khabarovsk Territory, 01, 08.2020. Among municipal formations, the borrowers are municipal and rural settlements, urban districts and municipal areas, for example, Balakovsky District, 02, 08.2020.

Commercial loans are raised through the Unified Information System for procurement in accordance with Federal Law No. 44-FZ dated 5/4/2013 "On Contract System for State and Municipal Procurement of Goods, Works, and Services".

Commercial loans are granted to the constituent entities and municipal formations of the Russian Federation in three forms:
1. non-revolving credit facility (Dubna, 01, 07.2020)
2. revolving credit facility (Voronezh, 01, 07.2020)
3. term facility (Alnashsky District, 01, 07.2020)

The main procurement methods used to raise commercial loans are electronic auction (Kostroma, 10, 07.2020) and request for proposals (Smolensk, 04, 07.2016).

The majority of public procurement of loans is conducted on the electronic platforms of Sberbank-AST and RTS-tender, as well as the Unified Electronic Trading Facility.
Cross-border loans - Cross-border loans are any loan agreements entered into by the lender and the borrower (or the borrower and several lenders) registered in different jurisdictions.Multi-currency loan - Financing provided with the option of using different currenciesPre-export financing - Funds advanced by a lending institution against confirmed orders from qualified foreign buyers to enable the exporter to make and supply ordered goods. Usually, the exporter arranges a commitment from the buyer to make the payment directly to the lender.Revolver, revolving loan - Banking arrangement which allows for the loan amount to be withdrawn, repaid, and redrawn again in any manner and any number of times, until the arrangement expires.Secured loan - Loan agreement under which a borrower pledges a specific asset or property which the lender can seize in case of default.Subordinated loan - Subordinated loan is a debt obligation which in case of a debtor’s bankruptcy is paid after the payment of other higher priority debt obligations, the so-called senior unsubordinated loans. Subordinated loans are unsecured and therefore riskier than older ones.

If a company starts bankruptcy procedure, accordingly, defaults occur on all of its obligations. The bankruptcy court assigns the company’s debts according to the priority of payments and requires the company to pay off existing debt according to the available assets. First, payments are due to holders of preferred shares, then payments will be done for senior unsubordinated loans and tax arrears. Then comes the turn of payments on subordinated loans, if funds remain for it. Holders of ordinary shares receive payments in the last turn. Based on the priority of payments, subordinated bonds are also subdivided into senior subordinated, subordinated and junior subordinated bonds.

Holders of a subordinated loan may receive a higher interest rate to offset possible losses. Borrowers for subordinated loans are most often represented by financial institutions and large corporations. Quite often issuers release parallel subordinated and senior bonds. Banks often issue subordinated loans to meet Tier II capital requirements rather than for financing purposes (as in the case of senior loans). The issue of a subordinated loan in this case is a cheaper solution than capitalization of equity capital. In some cases, this allows the tax deductions in the most favored regulatory regime.

From the perspective of the issuer, the structure of subordinated bonds is well defined and harmonized under the new regulations Basel III (for banks) and Solvency II (for insurers). Another type of subordinated securities is the so-called Contingent Convertibles, which could be converted into equity in case of a certain event. The analogue of these bonds for insurance companies are RT1 bonds issued to meet capital requirements under Solvency II. Conditional convertible bonds most often can be redeemed after a certain number of years at par, or the coupon will be refixed for a future period of time.

The corporate sector, on the other hand, is exempt from compulsory compliance with these rules, its securities are classified as hybrid. Nevertheless, corporate hybrid securities follow certain criteria of the rating agencies and they are relatively homogeneous asset type. According to the rating agencies’ methodology, hybrid securities are partially taken into account as equity when calculating the credit rating; accordingly, the purpose of issuing hybrid securities is to improve their credit rating, reduce costs and diversify financing, and refinance existing hybrid issues.
Syndicated loan - A syndicated loan (or "syndicated facility") is a large loan in which a group of banks work together to provide funds for a borrower. There are typically more than 2 banks involved in a syndication. There is usually one or more lead bank that takes a percentage of the loan and syndicates the rest to other banks. A syndicated loan is the opposite of a bilateral loan, which only involves one borrower and one lender (often a bank or financial institution.) A syndicated loan is a much larger and more complicated version of a participation loan.Syndicated loan tranche - - is a part of funds provided in the form of a syndicated loan. Different tranches of one loan can be denominated in different currencies, have different interest rates, tenors and other material parameters defined by organizers.Term loan - Short-term (usually for one to five years) loan payable in a fixed number of equal installments (usually semiannually) over the term of the loan.

Rates of Interest


Bank Rate of The Bank of England - The official bank rate (also called the Bank of England base rate or BOEBR) is the interest rate that the Bank of England charges Banks for secured overnight lending. It is the British Government’s key interest rate for enacting monetary policy. It is more analogous to the US discount rate than to the Federal funds rate. The security for the lending can be any of a list of eligible securities (commonly Gilts) and are transacted as overnight repurchase agreements. Changes are recommended by the Monetary Policy Committee and enacted by the Governor.Basis point (bp) - is a one hundredth part of a percent (%).Basis rate - Basis rate is the indicator, which the margin is added to or subtracted from, to determine the final rate of the loanEURIBOR - The Euribor (acronym for Euro Inter Bank Offered Rate) is a reference rate for forward financial transactions carried out on the interbank market. It is the average interest rate of financial transactions in Euro between the main European banks (excluding, from the calculation, the lowest 15% and the highest 15% of the rates received) belonging to the European Money Markets Institute.

The main European banks are a group of 19 banks belonging to the European Union (active both in the Euro zone and elsewhere) that meet the high reliability requirements for short-term deposits and are able to lend money at competitive interests on the market. In addition to their characteristics of solvency and reliability, these banks were also chosen to best represent the geographical diversity of the European financial market and to provide a reliable representation of the reference rates over time.

The Euribor, in fact, coincides with the birth of the Euro (January 4, 1999), and was created in order to replace the various money market rates that were present in the individual countries of the European Union.

The value of the Euribor is updated daily: every morning, by 10:45 of each day the Target system is opened, the banks provide the data to a company (the Global Rata Set System Ltd) and by 11 am these data are reprocessed and published. This company simply deals with analyzing the data sent by the banks, processing them by making a simple average of the individual rates (excluding from the calculation, as mentioned, the lowest and highest 15% of the individual rates received in order to clean up the calculation) and finally publish the daily values of the different updated Euribor rates rounded to the third decimal place. The resulting numerical value corresponds to 70% of the original average and represents the Euribor at a given deadline.

In fact, there is no single Euribor rate, but, depending on the duration of the deposit, we can have several Euribor rates that will range from Euribor to 1 week to Euribor 1 year .

As with all interest in relation to their duration, the Euribor normally increases with the duration of the loan. All other things being equal, the 1-year Euribor will normally be higher than a 6-month Euribor which in turn will be higher than a 3-month Euribor and so on.

An example of a Bond with 1-month Euribor; An example of a Bond with 3-month Euribor; An example of a Bond with 6-month Euribor.

The importance of the Euribor

The Euribor is considered a very reliable indicator of the cost of money, but at the same time it is very sensitive to market trends. Not infrequently, thanks to its characteristics, it anticipates the times by recording the changes in the cost of money even weeks before the European Central Bank makes the changes. As a rule, as the markets tend to rise or fall, the Euribor adjusts accordingly. For example, if an increase in interest rates is expected in 6 months, the 1-month and 3-month Euribor will not be affected very much, remaining almost indifferent, but the 6-month or 1-year Euribor will immediately tend upwards.

In any case, the reasons that determine the fluctuations in rates are many: the desire to favor economic development can make interest rates contain, in such a way as to favor debt as the cost of money will be lower and consequently favor investments of businesses and private consumption. At the same time, a currency that tends to weaken can be strengthened by the inflow of capital attracted by higher rates, and vice versa.

In addition, in recent years, due to the crisis in the financial markets, there have been many interventions by the European Central Bank in order to contain these rates which, by injecting excess liquidity into the market, have contributed to creating a new and unpredictable situation at the time of the Euribor. In fact, the introduction of massive doses of liquid money into the economic system led the Euribor rates first to decline and subsequently, in some cases, to even reach negative values, leading the banks and various market operators to adjust accordingly.

In fact, in this case, the interests are no longer in favor of the financial institution, but in favor of the debtor. Therefore, the provisions of the various national banks have provided for the stipulation of a "Floor" clause which must be provided for in every loan agreement with clear and precise indications. On the other hand, for old contracts that did not include this floor clause, it will be up to the bank to calculate the interest in favor of the debtor with extreme care, subtracting the negative value directly from the calculation of the spread that is applied on the cost of the loan.

But the laws of the markets often escape the will of the central banks and therefore can often only adapt to factual situations. In fact, international imbalances exogenous situations, simple supply and demand factors can significantly affect the performance of the Euribor and consequently the cost of money, having a strong impact on the economy. Not least they can also be real financial speculations used by large investors or credit institutions that can significantly affect the rate trend.
Federal funds rate - In the United States, the federal funds rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances. The federal funds rate is an important benchmark in financial markets. The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate. The federal funds target rate is determined by a meeting of the members of the Federal Open Market Committee which normally occurs eight times a year about seven weeks apart. The committee may also hold additional meetings and implement target rate changes outside of its normal schedule.LIBOR - LIBOR (abbreviation for London Interbank Offered Rate), as the name implies, it’s the interest rate at which the largest banks in London are ready to provide unsecured loans to each other for various periods (overnight, week, month, 2 months , 3 months, 6 months, 1 year). It’s calculated for five reserve currencies: USD, GBY, EUR, JPY, CHF. Accordingly, LIBOR is a group of 35 interest rates (for each term for each currency). Until 2013, LIBOR was also calculated for another several currencies (SEK, DKK, CAD, AUD, NZD) and several terms (2 weeks, 4, 5, 7, 8, 9, 10 and 11 months).

LIBOR is considered to be the benchmark short-term interest rate and benchmark for many instruments in the financial market, including bonds and derivatives. However, in 2008, during the global financial crisis, the LIBOR scandal erupted. It was revealed that banks entered into a cartel agreement and manipulated the value of the rate to create favorable conditions for themselves. This became possible due to a conflict of interest: they simultaneously participated in the LIBOR calculation and used the rate in their operations. Participants in the panel of banks were not obliged to conclude transactions on the interbank market and issue loans to each other at a specified rate. The LIBOR rate was supposed to reflect the state of the interbank lending market, although this market was much smaller than the markets where LIBOR was applied as the basis for price formation (for example, the derivatives market). Therefore, banks manipulated the rate in such a way as to improve their positions on third-party instruments. As a result, the British Banking Association ceased to administer LIBOR, from that moment ICE Benchmark Administration is responsible for compiling the methodology, calculating and publishing LIBOR values. Also, there were made adjustments to the methodology and the list of banks, participants in the calculation.

LIBOR is calculated as the arithmetic average of the interest rates of all banks, excluding the highest and lowest rates. The survey involves representatives of major banks (Lloyds Bank, Barclays, HSBC, UBS, Deutsche Bank, JP Morgan, The Royal Bank of Scotland, Societe Generale, Bank of Tokyo-Mitsubishi UFJ, Citibank, Mizuho, Credit Suisse, Rabobank, Santander, Royal Bank of Canada, Bank of America, BNP Paribas, Credit Agricole CIB, SMBC, The Norinchukin Bank). The resulting value is rounded to 5 decimal places and published at 11:55 am London time.

LIBOR is expected to be replaced by other interest rates after 2021 (e.g. SOFR for USD, SONIA for GBP). You can read more about the LIBOR reform at the link.

All 35 LIBOR rates are available on the Cbonds website, the values are published with a weekly delay. Information on them can be found in the "Indices" – "Index Search" section. LIBOR is located in the Money Market group, specified by the Interest rates subgroup. More information on LIBOR rates is available on the specific index page (for example, 3M LIBOR USD).

Floating rate bonds are often linked to LIBOR. on the Cbonds website this information is reflected in the “Coupon rate” field in the “Cash flow parameters” block. An example of a floating rate bond, benchmarked for 3-month LIBOR in US dollars: https://cbonds.com/bonds/413417/ .
LIBOR replacement -

Reform of LIBOR – replacement of LIBOR rates with credit risk for the alternative risk-free rates or near risk-free rates: risk-free rate or near risk-free rate.


It is possible to identify three most important reasons for this reform. Firstly, it is impossible to solve the issue of manipulating the values of interbank rates by LIBOR participating banks. Secondly, it is a high degree of LIBOR dependence on expert judgments, rather than on actual transactions (according to the US Federal Reserve, the daily volume of three-month borrowings is USD 500 mln). Finally, the third reason is the impact of LIBOR on financial stability.


The LIBOR alternative was selected by five advisory councils for the five largest world currencies: US dollar, Euro, Yen, Swiss Franc and British Pound.


In 2017 in the US, the Alternative Reference Rates Committee selected SOFR a rate, which will replace USD LIBOR and will be used in all contracts. At the moment, the Committee is developing an action plan for the transition from USD LIBOR to SOFR.


In 2017 in the UK, the Working Group on Sterling Risk Free Reference Rates recommended to use the rate SONIA as a replacement for GBP LIBOR. In 2018, reforms of SONIA were carried out for a more correct and complete calculation and compliance with the best practices of IOSCO.


In 2017 in Switzerland, the National Working Group on Swiss Franc Reference Rates recommended the SARON rate as an alternative to CHF LIBOR. Starting from June 13, 2019, the National Bank focuses only on the new benchmark SARON and sets the boundaries of its fluctuations. Switzerland became the first country where the regulatory authority began to use the new risk-free rate as a tool of its monetary policy.

In 2016, the Working Group on Risk Free Reference Rates of Japan decided that TONA would replace JPY LIBOR, JPY TIBOR, EUROYEN TIBOR.


More recently than in other countries, work has begun to identify and replace risk rates in euros. In 2018, the Working Group on Euro Risk-Free Rate developed the new benchmark called ESTR (€STR) as a new money market rate that will be an alternative to the three rates: EUR LIBOR, EURIBOR, EONIA.


It is impossible to waive LIBOR without creation of the fixed-period instruments, where the underlying asset is a risk-free rate. In this regard, the financial industry is actively developing new instruments and bringing them to the markets. In December 2017, the ICE launched SONIA futures, and in October 2018 – SOFR futures. In May 2018, the SOFR futures were listed on the CME exchange. In October 2018, the CME exchange started trading in SONIA futures. In October 2018, CME became the world’s first platform to start regular clearing of OTC SOFR swaps, with a maximum contract duration of 30 years. The contract terms allow the exchange of fixed payments in lieu of SOFR, as well as payments in USD LIBOR against SOFR and the effective federal funds rate (EFFR) against SOFR. In October 2017, LCH started clearing of interest rate swaps based on SARON. EUREX was the first to launch SARON futures trading in 2018.


It is anticipated that the publication of LIBOR rates may be stopped from 2022. All working groups and market participants are working to ensure that the full transition to alternative rates does not lead to losses on LIBOR instruments.


The first issue of FRN bonds based on a risk-free rate was held by the European Investment Bank in June 2018. This is a 5Y issue at GBP 1 bln, the interest rate depends on SONIA+0.35%. This was followed by the issues from the US government agency Fannie Mae with reference to SOFR in July 2018 (with maturity of 0.5 years, 1 year, 1.5 years). Then new issues in SOFR and SONIA started to appear several times a month.

Margin - Margin is a fixed part of the floating interest rate. For example, if the rate is 50bp over LIBOR, the Margin is 50bpMosPrime Rate - (MosPrime, Moscow Prime Offered Rate) is one of the main indicators of the Russian money market, indicating the rate at which the leading commercial banks grant and raise Russian Ruble loans or deposits in the Moscow money market.

The rate has been calculated by the National Finance Association since 2005. The list of banks whose rates are used to calculate MosPrime Rate is also formed by this organization, must include at least 6 organizations and is reviewed at least once a year. For example, MosPrime indicator can be calculated based on the rates of Alfa-Bank, Gazprombank, Sberbank of Russia, Raiffeisenbank, VTB, and other banks.

MosPrime is calculated according to the interest rates set by banks on loans (deposits) for overnight, 1 week, 2 weeks, 1, 2, 3, and 6 months. The tenors are calculated starting from "tomorrow", except overnight rate. Accordingly, there are seven types of MosPrime indices:

1) MOSPRIME O/N

2) MOSPRIME 1W

3) MOSPRIME 2W

4) MOSPRIME 1M

5) MOSPRIME 2M

6) MOSPRIME 3M

7) MOSPRIME 6M

For example, MOSPRIME 2M is an indicative rate for granting Russian Ruble loans or deposits for a 2-month period.

MosPrime Rate is calculated as the arithmetic average of rates that have been quoted by credit institutions involved in its compilation.

MosPrime Rate is updated every business day at 12:30 Moscow time.
Near-Risk Free Rates - Near-Risk Free Rates (RFRs) are overnight benchmark rates based on real transactions and linked to the money market. RFRs are also often related to as simply “risk free rates”.

The daily publication of Interbank Offered Rates (IBORs), which are most commonly used as benchmarks to date, relies on financial institution’s estimation, which makes IBORs dependent on an expert judgment and, hence, highly subjective. Since such uncertainty represents a serious systemic vulnerability, there is a demand for alternative benchmark rates. The main reason for implementing RFRs into global financial markets system is providing better governance and oversight around major interest rate benchmarks.

Some jurisdictions suggest unsecured funding (UK, EU, Japan) rather than secured funding alternatives (US, Switzerland). Yet, the credit risk of parties involved is negligible for overnight terms.

The selected alternative RFRs are reformed: Euro Short Term Rate (€STR) for euro, Sterling Overnight Index Average (SONIA) for sterling, Swiss Average Rate Overnight (SARON) for Swiss franc, Secured Overnight Financing Rate (SOFR) for US dollar and JPY Overnight Unsecured Rate (TONA) for yen.

Most of experts believe the worldwide transition from IBORs to RFRs can not be completed earlier than 2021.
Overnight Call RateTarget of Bank of Japan - The BOJ introduces regularly scheduled monetary policy meetings and the publication of meeting minutes beginning in 1998. Before 1998 till 1972, the target rate is updated weekly.Refinancing Tender Rate - The Governing Council of the ECB sets the key interest rates (Refinancing Tender) for the euro areaRUSFAR - (Russian Secured Funding Average Rate) is the Russian money market index, which serves as an indicator of the fair value of secured money. It has been calculated by the Moscow Exchange since April 2019.

RUSFAR is calculated based on repo orders and transactions with the central counterparty, which are secured with clearing participation certificates. The index may be calculated in Russian Rubles and US dollars
.
RUB RUSFAR is calculated with maturities overnight, of one week, two weeks, one month, and a quarter. Accordingly, there are 5 types of RUB RUSFAR indices:

1) RUSFAR O/N;

2) RUSFAR 1W;

3) RUSFAR 2W;

4) RUSFAR 1M;

5) RUSFAR 3M.

RUSFAR USD is generally calculated with maturity of 1 day (overnight).

According to the procedure of the Moscow Exchange, RUSFAR is calculated as follows:

R = Vol/MinVol * Rtrades + (1 – Vol/MinVol) * Rorders,

where

R is the RUSFAR index value;

Vol is the total volume of transactions used to calculate the index;

MinVol is the minimum required volume of transactions;

Rtrades is an average Rate for trades;

Rorders is an average Rate for orders;

About 20 market makers take part in compiling the RUSFAR index. These organizations include Sberbank of Russia, Credit Bank of Moscow, PJSCB Derzhava, Otkritie Broker, Brokercreditservice, Bank Saint Petersburg, Renaissance Broker, and other organizations.

RUSFAR index is updated every business day at 12:30 Moscow time. The index is measured in percent per annum.
SARON -

SARON (Swiss Average Rate Overnight) is a weighted average interest rate of the secured funding in Swiss francs. The rate reflects real transactions and quotes for repo transactions in Switzerland, which are concluded on SIX Swiss Exchange.


SARON was created on August 25, 2009 with historical data available since June 30, 1999.


SARON is continually calculated in real time and published every 10 minutes. In addition, SIX publishes SARON fixing at 12:00, 16:00 and on closing at 18:00. The average daily trading volume in 2018 was around CHF 3.2 billion.


In 2017, the National Working Group on the Reference Rate, representing the participants of the Swiss financial market, proposed SARON as an alternative as part of the LIBOR CHF reform. This measure is a step towards the transition to risk-free rates as part of the global reform of interest rate benchmarks.


It is believed that SARON is a better indicator than CHF LIBOR, since SARON reflects both concluded transactions and binding quotes on the Swiss repo market.


Until June 13, 2019, the Swiss National Bank set the upper and lower limits for the fluctuation of the three-month CHF LIBOR, but now the regulator takes into account only the new SARON benchmark and sets the limits for its fluctuations. Switzerland was the first country where the regulator began to use the new risk-free rate as an instrument of its monetary policy.


In October 2017, the LCH clearing platform began to clear SARON interest rate swaps, and in 2018, the largest exchanges EUREX and ICE Futures Europe launched futures trading.


In September 2019, Credit Suisse Group issued first SARON-linked bonds on the Swiss market. These are Tier 1 bonds, which pay a fixed rate of 3% until 2025, and then the rate is SARON + 3.957%.


SOFR - The Secured Overnight Financing Rate (SOFR) is a near-risk free rate measuring the cost of borrowing cash overnight collateralized by Treasury securities.

While most LIBOR submissions are still based on expert judgment, the SOFR is fully transacted-based, with Bank of New York Mellon (BNYM) and the Depository Trust and Clearing Corporation (DTCC) providing transaction-level data for three repo market segments: General Tri-Party, Inter-dealer Tri-Party and FICC-Cleared Bilateral. This reference rate encompasses a robust underlying market, is nearly risk-free and correlates closely with other money market rates, but less volative than banks rates (e.g. LIBOR).

Each business day, the Federal Reserve Bank of New York calculates and publishes the SOFR at approximately 8:00-8:30 a.m.


First SOFR linked bonds were issued by the GSE Fannie Mae in July 2018 (with maturity of 0.5 years, 1 year, 1.5 years).



SOFR rates are published one business day delay in Indices section, Index type: Interest rates Indicators: SOFR.
SONIA -

SONIA (the Sterling Over Night Interest Average) is the representative of the risk-free rate and a successor to GBP LIBOR.


SONIA is the amount of interest paid overnight on obligations with minimal credit risk, liquidity risk and other risks. SONIA is calculated every business day in London based on the transactions entered into between the financial institutions. The rate administrator is the Bank of England. The calculation methodology was approved on April 23, 2018 after several meetings with market participants.


The first issue of FRN bonds based on SONIA was held by the European Investment Bank in June 2018. This is a 5Y issue at GBP 1 bln, the interest rate depends on SONIA+0.35%.


Some issuers amends terms of outstanding LIBOR linked floates and change rates to daily compounded SONIA, for instance after bondholders approving LLOYDS BANK effective on October 7, 2019 change the terms of its covered bond issue maturing in 2024.WIBOR - Warsaw Interbank Offered Rate€STR -

€STR(Euro Short-Term Rate), formerly called ESTER, is a rate that reflects the weighted average cost of unsecured overnight borrowing in the interbank market of the euro area.


In 2018, €STR was proposed as a new risk-free rate of the money market, which replaces three risk rates: EUR LIBOR, EURIBOR, EONIA. Replacement of the rate is related to the ongoing reform of benchmarks in the world.


Despite the fact that the rate was developed in 2018, its first publication took place only on October 2, 2019. Until that moment, pre-€STR was published – a rate calculated on the basis of data and methodology of the “real” €STR.


The €STR is administered by the European Central Bank. The ECB collects statistical information on money market activities in the European Monetary Union and publishes it in the MMSR. The €STR is calculated on the basis of the weighted average volume of transactions of 50 MMSR participating banks, trimmed by 25% of the top and bottom limits of the volume. A proportional calculation is applied to volumes that overlap with trimming thresholds to ensure that exactly 50% of the total allowable volume is used when calculating the weighted average volume.


The European Central Bank publishes the €STR of the previous business day on the next business day at 08:00 CET (TARGET2 calendar).


In 2019, the average daily volume of transactions on the basis of which the pre-€STR was calculated amounted to EUR 37 billion. This is more than 15 times the size of the EONIA transaction market. On average, pre-€STR is lower than EONIA by 8.5 bps.


Compared to EONIA, the €STR is more stable due to the larger number of participating banks, the larger volume of transactions and the trimmed volume principle when calculating the rate value. Besides that, among the features of the €STR, the opposite effect of the end of the month can be distinguished – the value of €STR falls at the end of the month, while the value of EONIA grows.


The London Clearing House will start clearing the €STR swaps on October 21, 2019.


A transition to discounting the fixed-period instruments at the €STR is scheduled for the second quarter of 2020.


FRNs based on the risk-free €STR were issued for the first time by the issuer Landeskreditbank Baden-Wurttemberg in September 2019. This is a 2-year issue for EUR 250 million, the interest rate depends on €STR + 2%.


Market participants


Agent - Agent is the bank responsible for the loan management after the facility is signedAsian Development Bank - is a regional financial long-term lending institution of development projects in Asia and the Pacific. It was established in 1966 with headquarters in Manila (Philippines). Its members include 45 countries, 29 of which are the countries of Western Europe and America.Bank for International Settlements - is a clearing house, acting on a joint basis. The shareholders are central banks of foreign exchange markets. Bank for International Settlements is the main meeting place for central bank governors. Settlements are carried out in Swiss gold francs, the dividend is paid annually in U.S. dollars at the exchange rate of the currency market in Zurich.Bookrunner - A bookrunner is usually the main underwriter or lead-manager/arranger/coordinator in equity, debt, or hybrid securities issuances. The bookrunner usually syndicates with other investment banks in order to lower its risk. The bookrunner is listed first among all underwriters participating in the issuance.Bookrunner - Bookrunner is an investment bank or investment company which helps the issuer to place bonds on the market. The bookrunner may be responsible for the compliance of the issued securities according to the legislation.

The bookrunner performs the following tasks: analysis of the possibilities and outlook of the issuer’s entry into the market, determination of the conditions and parameters of the issue, preparation of the issue documentation, interaction with other market participants, formation of a pool of investors, conducting PR events (road shows and other ways of interaction with potential investors), etc. The amount of remuneration is determined as a% of the volume of the issue. The percentage of remuneration is highly dependent on the category of the borrower.

Information about the bookrunners of the initial placement is displayed in the "Placement" block in the "Bookrunner" field, the arrangers of additional placements can be seen in the "Auctions and additional placements" block.

Cbonds compiles Bookrunners’ league tables for various markets and market segments. Ready-made rankings are presented in the section: http://old.cbonds.com/rankings/

The user can also generate his own ranking of organizers by setting their own criteria in the IB League Tables: http://old.cbonds.com/rankings/generator/
Clearstream - is an international clearing system located in Europe, which provides storage, clearing and settlement of transactions with international securities; it was established in 2000 as a result of a merge of Cedel and Clearinghouse Deutsche Boerse Clearing; since July 2002 it has completely come under management of Deutsche Boerse AG. The system comprises three branches: Clearstream Banking Frankfurt, Clearstream Banking Luxembourg and Clearstream Services.Depository - is a professional participant of the security market, performing services on storage of securities certificates and / or registration and transfer of securities title. In Russia, only a legal entity can function as a depository. Historically, the term “Depository" was identified with the bank safe, where values were deposited. Due to the rapid growth of security market, issues of a large number of different securities have become the main object of depository activities.Euroclear - is a system for the settlement of securities (bonds, shares, fund units) transactions in the domestic and international markets. It provides settlement services to major financial institutions located in more than 80 countries. It was established in 1968 in Brussels; group of companies Euroclear Group comprises Euroclear plc., Euroclear Bank and Euroclear France. In September 2002, British Euroclear merged with the settlement organization CrestCo.European Bank for Reconstruction and Development - (EBRD) is a regional interstate bank for long-term lending to countries in Central and Eastern Europe. It was established in 1991. The location is in London.

A list of all outstanding bonds of the EBRD is available at bonds search section.
Financial advisor - A financial advisor provides financial advice or guidance to customers for compensation. Financial advisors, or advisers, can provide many different services, such as investment management, income tax preparation and estate planning.Financial Industry Regulatory Authority (FINRA) - In the United States, the Financial Industry Regulatory Authority, Inc. (FINRA) is a private not-for-profit corporation that acts as a self-regulatory organization. FINRA is the member regulation, enforcement, and arbitration operations of member brokerage-dealership firms and exchange markets. The government agency which acts as the ultimate regulator of the securities industry, including FINRA, is the Securities and Exchange Commission.Foreign bank branch -

Very often huge banks, which operate in some countries in different time and currency zones issue notes acting through its foreign branches in another country for certain legal (for instance tax), administrative and regulatory reasons, including (without limitation) to facilitate timely access to funding markets. In these cases interest payments maybe subject to applicable tax laws and regulations of the country of a branch location.


A branch is not a subsidiary and does not comprise a separate legal entity. The obligations under the notes issued by an issuer acting through its foreign branch are of an issuer only, and investors’ claims under notes are only against an issuer.


Foreign branch is obligated to follow the regulations of both the home and host countries, operating in the country.


Bank of China, which is regulated by the People’s Bank of China has got branches in European, Asian and American financial centres to fund its foreign currency needs in EUR, USD, JPY needs. Another example is Credit Suisse AG acting through its London branch.

Guarantor - A guarantor - is a party who guarantees to provide payment on a bond, loan, or other liability in the event of default. A guarantor acts as a co-signor of sorts, in that they pledge their own assets or services if a situation arises in which the original debtor cannot perform their obligations. Guarantors reduce the risk to loans and liabilities, and usually improve the credit ratings of bonds.International Finance Corporation - is an independent branch of the World Bank, formed in 1971 for investments in the private sector of the countries, following the privatization path.Investor - is any person who commits capital with the expectation of financial returns. Investors utilize investments in order to grow their money and/or provide an income during retirement, such as with an annuity.Issuer - A legal entity that develops, registers and sells securities for the purpose of financing its operations.Market maker - is a broker-dealer firm that assumes the risk of holding a certain number of bonds of a particular security in order to facilitate the trading of that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of bonds, and once an order is received from a buyer, the market maker immediately sells from its own inventory or seeks an offsetting order.MILA - MILA (The Mercado Integrado Latinoamericano) is a platform that integrates the depositories and stock exchanges in Chile, Colombia, Mexico, and Peru. It was officially launched on May 30, 2011. The purpose of its creation is the development of the financial markets of member countries by providing investors with a wider choice of securities, issuers, and larger sources of financing.Paying agent - Paying agent - an institution, usually an investment bank, that accepts funds from the issuer of a security and distributes them to that security’s holders. In bonds, it receives coupon payments, which it then gives to bondholders. A paying agent acts as an intermediary in these transactions, and receives a fee for these services.Rating Agency - is a profit organization providing the assessment of the issuers’ solvency, debt obligations, corporate governance quality, asset management quality, etc. The most well-known product of Rating Agencies is the assessment of solvency - credit rating. It reflects the risk of non-payment of a debt obligation and affects the interest rate, cost and debt obligation yield. In this case, a higher rating corresponds to a lower risk of non-payment.SPV or SPE - This is a special purpose vehicle (SPV) or special purpose entity (SPE), which is created for the specific purposes. SPVs are quite actively used due to the fact that they are free from previous debt and obligations and they are separated from the founding companies, which create them, among other things, to facilitate accounting and in order to reduce taxes, issue debt obligations, and securitization.
One type of SPV is the Structured Investment Vehicle (SIV). It is an SPV which is set up to buy high-risk bonds (such as mortgage securitization). Modern software allows you to create models that forecasts the cash flow on such bonds in different market conditions, as well as control the risks associated with SIV activities. SIVs are usually funded by primary investors (also called capital bondholders) and through short-term bond issues (commercial issues). The profit is derived from the difference between the coupon paid on short-term borrowings and the coupon received on long-term investments. The profit is split between the holders of the capital bonds and the investment manager (the company that runs the SIV, in most cases is represented by a bank).

Reasons to use
a. Usually they created for some specific goal, project, implementation of a financial transaction, the purchase of assets, joint ventures or to isolate the assets or operations of the parent company. SPV can be on a balance sheet and off the balance sheet of the parent company.
b. Protection of funds and assets. Allows the parent company to maintain a higher level of asset and liability management. It also reduces the risks of the parent company; thus it allows to obtain a higher credit rating. It reduces financing costs and provides more financial flexibility with lower capital requirements.
c. Protection against bankruptcy and creditors. It allows the parent company to carry out high-risk financial transactions or investments without jeopardizing the solvency of the entire company. If the SPV’s investment turns out to be unprofitable or the SPV goes bankrupt, these processes will not affect the parent company.
d. Easy financing conditions. It provides a possibility for the company to obtain financing and make transfers of debt with a higher level of risk.
e. Lighter legal requirements. These companies are not subject to the same requirements as the parent companies, which gives SPVs more leeway.
f. Investment strategy. It allows the parent company to check the investment opportunity before getting actually involved in the process itself.
g. Confidentiality. It may help maintaining commercial secrets from competitors or investors in the parent company who may not approve a particular transaction or asset allocation.

The benefits and risks associated with the SPV
Benefits:
a. Isolated financial risk.
b. Direct ownership of a specific asset.
c. Tax incentives if the company is incorporated in a tax offshore.
d. Ease of creation.

Risks:
a. More difficult access to the capital at the SPV level (since this company does not have the same capabilities as the parent company).
b. If an asset is sold, it may be revalued at the market value, which could seriously affect the parent company’s balance sheet.
c. Changes in the legislation can cause problems in the use of SPV.
d. Sometimes there is a negative information background around SPV.

Ireland, the Caribbean Islands (British Virgin Islands, Bermuda, Cayman Islands) and the Channel Islands (Jersey, a href="https://cbonds.com/company/56953/" target="_blank">Guernsey) are the most common places of registration for SPVs.
Stock Exchange - is an organization that provides some facilities: security exchange, IPO.The aim of the stock exchange is to help buyers of the stock find sellers of the stock. The big exchanges are LSE, NYSE, Nasdaq, Frankfurt Stock Exchange, Tokyo Stock Exchange, Shanghai Stock Exchange.Surety - An individual or corporation that guarantees the performance or actions of another. A surety , as a general rule, is a party to the original contract of the principal, he signs his name to the original agreement at the same time the principal signs, and the consideration for the principal’s contract is the consideration for the agreement of the surety’s. The surety is therefore bound on his contract from the very beginning, and he is bound also to inform himself of the defaults of the principal debtor, and he is not in any part relieved from his obligations under the contract by the creditor’s failure to inform him of the principal’s default in the contract, for which contract the surety has become the security for.Syndicate - is a group of financial institutions, organized to carry out a particular transaction – an extention of a credit, placement of a bond issue.Syndication participant - Syndication participant is one of the banks providing the syndicated facilityThe United States Securities and Exchange Commission (SEC) - The Securities and Exchange Commission (SEC) is an independent agency of the United States federal government. The SEC holds primary responsibility for enforcing the federal securities laws, proposing securities rules, and regulating the securities industry, exchanges, and other activities and organizations, including the electronic securities markets in the United States. The mission of SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.Underwriter - is a company or other legal entity that manages the securities issue and their distribution. Underwriter guarantees the issuer the revenue from the sale of securities, and actually buys securities. Typically, an investment bank acts as an underwriter.
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