Issuers questioning

Step-up callable notes are a particular type of structured fixed income products. These bonds offer a coupon payment that increase during the bond s life. Moreover, they include a call option, that as we discussed earlier, the issuer has the right to redeem the bond early. The question, whether a callable step-up note will be called or not always depends on the evolution of interests rates. Therefore, the inclusion of these two characteristics makes the bond attractive to investors with higher performance than a conventional bond. The added variable coupon element acts for an investor as cushion compared to a conventional callable bond. In fact, the increasing coupon payment increases the value of a callable bond. However, if interest rates go down and coupon payments increase, the incentive of the issuer to redeem the bond early is greater than a simple callable. 

A Z-spread can be calculated relative to any benchmark spot rate curve in the same manner. The question arises what does the Z-spread mean when the benchmark is not the euro benchmark spot rate curve (i.e., default-free spot rate curve) This is especially true in Europe where swaps curves are commonly used as a benchmark for pricing. When the government spot rate curve is the benchmark, we indicated that the Z-spread for nongovernment issues captured credit risk, liquidity risk, and any option risks. When the benchmark is the spot rate curve for the issuer, for example, the Z-spread reflects the spread attributable to the issue s liquidity risk and any option risks. Accordingly, when a Z-spread is cited, it must be cited relative to some benchmark spot rate curve. This is essential because it indicates the credit and sector risks that are being considered when the Z-spread is calculated. Vendors of analytical systems such Bloomberg commonly allow the user to select a benchmark. 

While it is not uncommon for active market makers and end users to utilize their own, customized set of tools for credit default swap valuation, many, if not all of these methodologies arise from the same general framework and ask the same two questions What is the probability that a particular issuer will default and, Upon the occurrence of a default event, what does one expect to recover from an issuer ... 

After assessing a bond with the help of credit analysis, the question arises to what extent the market price of this bond corresponds with the investor s judgement. The market price should compensate the investor for all risks connected with holding the bond. This market price (spread) is often referred to as the return differential between the analysed bond and the benchmark. Frequently, government bonds or the swap rate with matching maturities are used as benchmarks. Another standard reference are bonds of other issuers that are active in the same business field. Since one debt instrument is assessed relative to another debt instrument, this analysis is also called relative value analysis, the basic principles of which are described in this section. 

With respect to certain information in the offering circular, the arranger and its legal advisers should question the issuer and its accountants in relation to any unexplained changes in the historical information (whether financial or otherwise) made available by the issuer. 

The arranger should meet senior officers of the issuer on at least one occasion and have an opportunity to ask questions, designed to ensure not only that the offering circular is accurate but also that there are no circumstances or potential developments, which ought to be disclosed... 

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