What are Medium Term Notes and Commercial Papers?

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What are MTNs and CPs?
Medium Term Notes (MTNs) and Commercial Papers (CPs) offer entities diverse avenues to raise capital. While both serve as debt instruments, they exhibit distinct characteristics tailored to different financing needs. This article intends to demystify these two instruments, crucial for entities and investors in navigating the financial landscape.

Medium Term Notes
MTNs represent debt securities issued by corporations, financial institutions, or governments with maturities typically ranging from 5 to 10 years. These notes, structured to raise funds, offer investors fixed or floating interest rates over the note's tenure. What sets MTNs apart is their flexibility in terms, allowing customization to meet specific issuer and investor requirements. On the other hand, Islamic Medium Term Notes (IMTNs)  share similarities in their structure as debt instruments used for fundraising, but they differ significantly where IMTNs are structured in compliance with Shariah principles.

Both MTNs and IMTNs offer several advantages to both issuers and investors in the financial market, contributing to their popularity and versatility.

Some of the advantages of MTNs and IMTNs for issuers are:

  1. Flexibility in Terms: MTNs provide issuers with the flexibility to customize the terms of the notes, including maturity periods, interest rates, and payment structures. This flexibility allows issuers to tailor the notes to meet specific financing needs and market conditions.
  2. Diverse Financing Options: With MTNs, issuers can access a wide range of investors, offering different tenures and interest rates. This diversity attracts various investors, allowing issuers to tap into a larger investor base.
  3. Streamlined Fundraising: MTNs enable streamlined fundraising processes, as issuers can register with regulatory bodies once for multiple issuances, reducing administrative burdens compared to repeated registrations for varying maturities.

MTNs and IMTNs also offer advantages to investors. Some of these advantages are:
  1. Variety and Choice: MTNs offer investors a variety of investment options with different maturities, interest rates, and risk profiles. This variety allows investors to diversify their portfolios and manage risk effectively.
  2. Market Liquidity: MTNs are often traded in secondary markets, providing liquidity to investors who may need to sell their holdings before maturity. This liquidity enhances market efficiency and flexibility for investors.
  3. Stable Returns: Typically, MTNs provide fixed or predictable returns to investors, offering stability in income streams over the note's tenure, which can be appealing to income-oriented investors.
  4. Customization and Tailored Investments: Investors can select MTNs that align with their investment preferences, whether seeking short-term, medium-term, or longer-term investments, thereby customizing their portfolios to match their risk tolerance and investment horizon.

Commercial Papers
Contrastingly, CPs serve as short-term debt instruments issued by corporations to raise funds for immediate financing needs. CPs usually mature within 1 to 270 days, offering investors a relatively short-term avenue for investment. They often come with discounted face values, providing an attractive investment opportunity with higher yields compared to longer-term instruments. On the other hand, Islamic Commercial Papers (ICPs) are structured in compliance with Shariah principles, adhering to Islamic finance laws that prohibit interest (riba) and promote ethical and Shariah-compliant investment practices.

Both CPs and ICPs offer several advantages for both issuers and investors, making them a popular choice in the short-term debt market

Some of the advantages of CPs for issuers are:

  1. Quick Access to Funds: CPs enable companies to raise funds swiftly to cover short-term cash flow gaps or immediate financing needs without the lengthy processes involved in other forms of financing.
  2. Cost-Effectiveness: Compared to traditional bank loans, CPs often offer lower borrowing costs, providing issuers with a cost-effective financing option, especially for short-term funding requirements.
  3. Flexibility in Maturities: CPs come with varied maturity periods, allowing issuers to choose the appropriate tenure that aligns with their specific cash flow requirements, whether it's for a few days or several months.
  4. Diversification of Funding Sources: Utilizing CPs allows companies to diversify their funding sources beyond conventional bank financing, reducing dependency on a single source and spreading the risk.

CPs and ICPs also offer advantages to investors. Some of these advantages are:
  1. Higher Yields: CPs typically offer higher yields compared to other short-term investment options, attracting investors seeking relatively higher returns within short investment horizons.
  2. Short-Term Investment Opportunities: Investors looking for short-term investment options with flexibility often turn to CPs, allowing them to invest for durations as short as a few days up to several months.
  3. Liquidity and Marketability: CPs are traded in secondary markets, providing liquidity to investors who may need to sell their holdings before maturity, enhancing market efficiency.
  4. Risk Diversification: Investors can diversify their portfolios by investing in CPs issued by different companies with varying credit ratings and maturities, thereby managing risk more effectively.

Example of MTNs and CPs 
Let’s take a case study to understand how MTNs and CPs work. In June 2007, Cagamas Berhad, the National Mortgage Corporation, launched its RM60 billion Conventional and Islamic CPs and MTNs Programme. During that time, this programme was not only the largest funding programme of its kind in Southeast Asia but with a 40 year tenure, the MTN programme represented the longest Programme tenure established in Malaysia.

The CP/ MTN Programme comprises a RM20 billion Conventional / Islamic CPs Programme with a tenure of seven (7) years and a RM40 billion Conventional / Islamic MTNs Programme with a tenure of 40 years. Providing a wide range of short term CPs and MTNs of up to 40 years, the CP/MTN Programme had catered for the varying needs of the investment community.

The CP/MTN Programme was conducted to fund Cagamas’ Purchase with Recourse (PWR) and Purchase WithOut Recourse (PWOR) schemes. The CP programme had received a P1, MARC–1 rating; while the MTN programme has received a AAA rating by Rating Agency Malaysia Berhad (RAM) and Malaysian Rating Corporation Berhad (MARC), denoting the highest safety in repayment capability. These credit ratings underscored Cagamas’s high asset quality and the strength of its balance sheet.

From the issuer’s perspective, the establishment of this programme had enhanced Cagamas’s role as a catalyst in the broadening and deepening of the bond market, reinforcing Cagamas’ position as leader in providing depth and liquidity in the capital market, as well as intermediary for efficient allocation and capital and facilitating risk management for the financial market. Another advantage of issuing this programme was the CP/MTN programme had enabled Cagamas to issue conventional or Islamic debt securities more cost effectively. This measure ensured that Cagamas will continue to provide competitively priced funding to the financial markets.

In essence, while both MTNs and CPs serve as instruments to raise capital, they differ significantly in terms of maturity periods, customization, risk, and yields. MTNs cater to longer-term financing needs, offering flexibility and customization, whereas CPs provide short-term liquidity solutions with higher yields but less flexibility in terms.

By comprehending the nuances between these debt instruments, entities can make informed decisions aligning with their financing objectives, ensuring optimal utilization of these avenues to raise capital and meet their financial requirements, while investors can make informed investment decisions of which instruments meet their investment objectives and risk appetite.

This report has been prepared and issued by Bond and Sukuk Information Platform Sdn Bhd (“the Company”). The information provided in this report is of a general nature and has been prepared for information purposes only. It is not intended to constitute research or as advice for any investor. The information in this report is not and should not be construed or considered as an offer, recommendation or solicitation for investments. Investors are advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situation and particular needs and should seek appropriate personalized financial advice from a qualified professional to suit individual circumstances and risk profile.

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