Your guide to bond issuance and loan transactions

Have you read the deal announcements that recognise Nordea as bookrunner, joint bookrunner or lead arranger, and wondered how it all fits together? Let us walk you through it.

Debt is a critical source of finance for the economy. When companies, financial institutions, municipalities or governments need to raise capital to finance a large project or to refinance debt, they may look to issue bonds as a financing solution. The most common debt financing instrument is the bond. We’ll first look at the bond market and its participants and later get to the syndicated loan market and its participants.

The two financing mechanisms (bond issuance and syndicated loans) are not incompatible and can be complementary. However, it is important to distinguish between the two to understand how they work.

Bond Issuance

Bonds: A bond is a fixed-income instrument that functions as a loan from an investor to a borrower. The bond defines the details of the loan such as its interest payments, which can be variable or fixed and are often referred to as the coupon, and its due date, or “maturity” date, which states when the loan is to be paid back.

Bonds are issued by companies, financial institutions, states or municipalities to finance projects that require significant funding. A bond issued by a company, for example, is called a corporate bond, and bonds issued by states are referred to as government bonds. Most bonds are public instruments but are typically traded only over-the-counter (OTC).

Corporate Eurobonds: A Eurobond refers to a bond issued by a company in a currency different from that of the country or market where the bond is issued. Corporate Eurobonds typically refer to the largest benchmark bond deals by corporate issuers, and they are a cornerstone investment for international and Nordic institutional investors.

What determines the value of a bond?

There are two features that primarily influence the value of a bond: the credit quality and time to maturity. The credit quality is determined by the issuer’s credit rating. Such ratings are supplied by third-party rating agencies such as Standard and Poor’s, Moody’s and Fitch ratings. If an issuer, such as a company, bank, municipality or government, has a poor credit rating, i.e. the risk of the loan not being paid back in full is high, then the interest rate is higher to compensate for the higher risk.

Time to maturity, the date when the loan is due to be paid in full, also influences the value of the bond. Bonds that have a short maturity date tend to have a lower interest rate. That’s because the risk is lower that the investor will be exposed to fluctuations in interest rates and potential inflation. In contrast, a bond with a long maturity date exposes the investor to interest rate fluctuations and potential inflation, and therefore the interest rate associated with the bond is higher.

Key roles in bond issuance

Now with the basic knowledge of a how a bond works, we can look at the role of banks in issuing bonds. The role may vary depending on the bank’s level of involvement and the size of its task, and that consequently affects the bank’s fee size.

Lead arranger / Active or physical bookrunner: This role is the biggest role and means that the bank has been selected by the issuer to place the issuance. The active bookrunner is responsible for keeping the investor order book and determining how much of the bond is allocated to each investor. The bank supports the issuer by arranging roadshows to make investors aware of the bond issuance. The active bookrunner is also responsible for advising on all documentation related to the issuance, a task that’s usually handled by an external legal advisor. In larger bond transactions there is typically more than one active bookrunner, forming a group of joint bookrunners.

Passive bookrunner: As the name suggests, a bank acting as a passive bookrunner does not issue the bond or have access to the investor order book. But the bank has a considerable investor base that they market the bond towards and is therefore crucial to completing the funding.

Credit ratings agencies: Ratings agencies such as S&P, Moody’s and Fitch Ratings can be asked to provide public ratings for bonds.

Syndicated loans

The syndicated loan market is a major contributor to debt finance, particularly for large-scale debt. Syndicated lending offers a debt financing alternative to bilateral lending or corporate bonds.

A syndicated loan is financing offered by a group, or a syndicate, of lenders. When a large loan is needed that a single bank cannot manage alone, a group of banks can pool together and offer a syndicated loan. The benefit of a syndicated loan is that the credit risk is spread over the participants in the syndicate, and the individual bank can participate in a financial transaction it would otherwise not be able to manage alone.

The borrower is often a corporation in need of a large sum of funding or debt financing for a project or a back-up facility for normal operations. When corporations use syndicated loans, the reasons often include IPOs, mergers, acquisitions, buyouts, other capital-intensive projects or the loan provides a back-up facility for other short-term financings or daily operations.

Key roles in the market for syndicated loans

Lead bank: This bank manages the arrangement of the syndicated loan. It selects the other banks to participate in the syndicate and sets financing terms. The lead bank receives an additional fee for providing this service. The lead bank is sometimes referred to as lead underwriter, lead arranger or bookrunner.

Joint bookrunner / Lead left bookrunner: When more than one bank acts as bookrunner, they are called joint bookrunners. In an underwritten deal the bookrunner(s) control the general syndication phase of selling the loan down to participant investors. A “lead left” bookrunner is a single bookrunner appointed to run the whole general syndication phase.

Mandated lead arranger (MLA): MLAs are banks mandated by the borrower to provide the primary arrangement and initial underwriting or provision of funds for the loan.

Coordinator: A coordinator bank can be appointed to facilitate the transaction and to liaise with the other lenders.

Participant lenders: These lenders participate in the loan through the general syndication or sell down and include smaller banks and non-bank lenders such as institutional investors, debt funds or hedge funds.

Credit ratings agencies: Ratings agencies such as S&P, Moody’s and Fitch Ratings can be asked to provide private and public ratings for syndicated loans.

How bonds and syndicated loans complement each other

Many companies use a combination of bonds and syndicated loans to manage their debt financing. These companies have realised that it’s not a question of either/or. Instead they can use both financing solutions to create a diversified structure for their funding needs.

Bonds vs. syndicated loans

1. Usually companies raise a syndicated loan from a group of banks, while with bonds, it’s the company or other borrower, with the help of a bank, that issues a bond in the financial market to investors in order to raise funding.
    
2. A bond generally allows for longer maturities while loans usually have a shorter repayment period.
    
3. Loans are flexible and can fit the current financing needs of the borrower/company, changing as the company evolves. They are also flexible, generally allowing for payment ahead of the loan’s due date and renegotiating of the loan terms. That’s not the case with bonds, whose refinancing terms are more fixed.

Nordea's Debt Solutions & Structuring has a dedicated team of experts that aim to provide the best solution for a customer’s financing needs, whether that’s a bond issuance, syndicated loan or a combination of the two.

Financing the transition

The debt financing markets are always evolving, and recent years have seen considerable growth in sustainable financing and green bond issuances. Nordea has played an active role in introducing sustainable financing solutions to the financial markets both in the Nordics and internationally. 

Green bonds: These bonds finance projects with a sustainability focus, such as those aimed at energy efficiency, pollution prevention, water management and sustainable agriculture.  

Green loans: Like green bonds, green loans are used to finance specific investments with environmental benefits. 

Learn more about our full sustainable finance product offering. 

Nordea's Large Corporates & Institutions is the leading Nordic debt house and is responsible for arranging, structuring and underwriting a broad range of transactions for corporates; financial institutions; sovereign, supranational and agency (SSA) and private equity borrowers.

Get a snapshot of selected transactions we’ve facilitated on behalf of our corporate and institutional clients since 2017. Visit our Transaction Library, and filter by category, sector and sustainability format.