What are the key components of an underwriting model for a new bond issuance?

1 Bond Terms

The first component of an underwriting model is the bond terms, which define the features and characteristics of the bond. These include the face value, coupon rate, maturity date, callability, seniority, and covenants. The bond terms affect the cash flows, yield, and risk of the bond, and therefore influence the demand and price of the bond in the market. You need to specify the bond terms based on the issuer's financing needs, credit profile, and market conditions.

2 Market Data

The second component of an underwriting model is the market data, which provides the information and benchmarks for pricing the bond. These include the risk-free rate, credit spreads, yield curves, comparable bonds, and market sentiment. The market data helps you estimate the fair value and yield of the bond, as well as the potential demand and supply of the bond in the market. You need to collect and analyze the market data from reliable sources, such as Bloomberg, Reuters, or rating agencies.

3 Financial Analysis

The third component of an underwriting model is the financial analysis, which evaluates the issuer's financial performance, creditworthiness, and ability to service the bond. These include the income statement, balance sheet, cash flow statement, financial ratios, credit ratings, and debt schedule. The financial analysis helps you assess the issuer's profitability, liquidity, solvency, and leverage, as well as the risk of default or covenant breach. You need to perform the financial analysis based on the issuer's historical and projected financial statements.

4 Sensitivity Analysis

The fourth component of an underwriting model is the sensitivity analysis, which tests the impact of changes in key assumptions or variables on the bond pricing and risk. These include the coupon rate, maturity date, call option, market interest rate, credit spread, and issuer's financial performance. The sensitivity analysis helps you measure the volatility and uncertainty of the bond value and cash flows, as well as the potential scenarios and outcomes of the bond offering. You need to conduct the sensitivity analysis using different methods, such as scenario analysis, breakeven analysis, or Monte Carlo simulation.

5 Underwriting Fees

The fifth component of an underwriting model is the underwriting fees, which represent the compensation for the investment bank and other parties involved in the bond offering. These include the management fee, selling concession, underwriter's discount, and other expenses. The underwriting fees affect the net proceeds and cost of capital for the issuer, as well as the profitability and reputation for the investment bank. You need to negotiate the underwriting fees based on the size, complexity, and risk of the bond offering, as well as the market practice and competition.

6 Offering Memorandum

The sixth component of an underwriting model is the offering memorandum, which is the document that summarizes and presents the bond terms, market data, financial analysis, sensitivity analysis, and underwriting fees to the potential investors. The offering memorandum is a marketing and disclosure tool that aims to attract and inform the investors, as well as to comply with the regulatory and legal requirements. You need to prepare the offering memorandum based on the issuer's profile, objectives, and strategy, as well as the investment bank's standards and guidelines.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?