Medium-term notes (MTNs) are a form of corporate debt financing. They originated in the 1970s when auto finance companies, and especially General Motors Acceptance Corporation (GMAC), started issuing debt securities with maturities falling between those of commercial paper and corporate bonds. The goal was to achieve better asset-liability management (ALM) for their auto loan books. Because the new debt had maturities greater than 270 days, it required registration with the Securities and Exchange Commission (SEC), just like corporate bonds. However, such registrations are expensive and time consuming. Because the auto finance companies wanted to make frequent small issuances to satisfy their evolving ALM needs, they needed a streamlined issuance process. In 1982, the SEC adopted Rule 415, which launched today's medium-term note market. This allows issuers to continually offer medium-term notes to investors in a manner similar to that of a commercial paper program. Unlike a commercial paper program, the medium-term notes must be registered, but registration is required only once every two years. During those two years, the issuer is free to modify the medium-term notes' nominal yield or term, as the issuer's needs or market demand require. The process is called shelf-registration, and it makes medium-term notes resemble commercial paper. Differences are that medium-term notes have longer terms, are registered with the SEC, and are usually coupon-bearing instruments, as opposed to discount instruments.
An issuer will generally engage two or more dealers to offer the medium-term notes on a best efforts basis. Through those dealers, the issuer advertises a rate schedule indicating nominal yields available for various terms our to perhaps ten years. The issuer changes its rates depending on market conditions and its immediate need for funds. At times, it may temporarily suspend issuing notes. If an investor is interested in purchasing notes at the offered rates, it contacts one of the dealers, who arranges the transaction. Should an investor want to buy notes for a term or nominal yield not offered, it may place a request through one of the dealers. If the issuer finds the request appealing, it may accept the proposed terms. This process is called a reverse inquiry, and it accounts for a considerable fraction of medium-term note issuances. Because medium-term notes entail credit risk, they are rated just like corporate bonds. The vast majority of issues are rated BBB– or better. There is a secondary market for medium-term notes supported by issuing dealers. If a dealer buys notes held by an investor, it may try to resell the notes or hold them in its own inventory. Traditionally, medium-term notes were issued as senior unsecured debt securities paying a fixed coupon for terms of between 270 days and ten years. Today, medium-term notes are structured in many ways. Even the name "medium-term note" has become a bit of a misnomer. The market is not defined by the instruments' terms so much as it is by shelf registration. Shelf-registered securities have been issued with terms of as much as 30 years, and they are called medium-term notes. There are floating-rate medium-term notes. Some structures have coupons linked to equity or commodity indexes. Securitizations are also issued as medium-term notes. One appeal of the market is the flexibility it affords. During the 1990s, debt instruments structured much like medium-term notes appeared as an extension of the Eurobond market. These Euro medium-term notes share most of the characteristics of medium-term notes. They exhibit a similar diversity in structures. Securitizations are particularly popular.
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