A stock promissory note is a short-term debt security that a private company issues on a stock market or stock market, governed by a series of rules. Stock notes are usually issued at a discount and their liquidity is lower than that of bonds.
Its nominal value is usually represented by multiples of 100,000 monetary units and represents corporate debt, being the equivalent of Treasury bills in public debt.
Financing via promissory notes is more expensive but also more flexible than bank financing.
The stock note should not be confused with a bank note or with the bill of exchange, not listed in any case.
How does a promissory note work?
When drawing up a promissory note program, the issuing company must take into account its financing needs, current market conditions, investment appetite in the market and the regulatory framework. For this, the services of an investment bank are usually hired, who will advise the operation along with other figures that we will see below.
Accordingly, the company chooses the characteristics that its program will have: issuance limit, interest rate and term.
A promissory note program can have multiple issues. In other words, sometimes companies are unwilling or unable to place all the promissory notes among investors in the first issue, called the inaugural issue. If that happens, and they are two very frequent possibilities, the company will carry out subsequent additional emissions.
These issues may have different nominals, which will vary on the supply side, according to the company’s needs and, on the demand side, according to the investor appetite or market demand.
Characteristics of a Securities Note
Among the main characteristics of a stock note, the following stand out:
- Program size : Represents the maximum amount to be issued, called the maximum outstanding balance.
- Nominal value : Represents the amount of money that will be delivered to the investor when the promissory note matures. The number of promissory notes that an issue will have (regardless of whether it is the inaugural or a later issue) is equivalent to dividing the maximum amount of the issue by the face value per note. For example, if Company A issues a 20 million currency unit note program with a nominal value per note of 100,000 currency units, the maximum number of promissory notes cannot exceed 200. If the inaugural issue is 10 million, the The number of promissory notes may not exceed 100, at that time, and there will be another 10 to be issued later.
- Term: It ranges from a few days to 720 days. Within these limits, the issuer has total flexibility to choose as many terms as they are convenient for and the limit amount associated with each one, if it so wishes. For example, a program can contemplate emissions based on three terms: one part issued at 1 month, another at 6 months and another at 9. It may also happen that in the inaugural broadcast you want to broadcast at the three proposed terms, but in one Subsequent issuance only issue within 9 months because an investor has requested it to do so.
- Interest rate : Depending on the term of the promissory notes, the interest rate will be different. Thus, shorter-term issues will offer lower rates than longer-term issues. The long-term rate rewards the investor for the risk of default derived from uncertainty and against inflation, among others.
- Price : Equivalent to the cash that the investor will ultimately disburse to buy the promissory notes. It is calculated taking into account the three previous points, using the formula of simple interest or compound interest, depending on the days remaining until the maturity of the promissory note. We see it with an example below.
- Market : The promissory notes can be listed both on regulated markets and in Multilateral Trading Systems (SME). The requirements demanded by SMEs tend to be more lax than regulated markets, which do more to protect the investor. In the case of SMEs, the responsibility lies entirely with the investor. As a protection measure, there is an implicit standard or market consensus that requires the issuer to have a credit rating rating issued by an independent rating agency.
- Guarantors : They are the legal or personal persons that respond in the event of default by the issuer.
- Requirements : Admission to trading of the promissory notes requires that both the issuer and the program be registered in the market in which it will be listed. This implies a series of specific documents to be presented by the issuer.
Figures associated with the issuance of promissory notes
Generally, companies that choose this way of financing usually do it with the help of an investment bank, which guides them throughout the process. The intervening figures are:
- Lead entity: Banking entity with an investment banking division whose mission is to coordinate the operation between the company and the rest of the figures.
- Registered advisor: Banking entity with an investment banking division in order to carry all communication with the market where the program is listed.
- Placement entity: It can be one or more banks and its task is to place the promissory notes, that is, to look for investors to sell them to. The securities-money exchange is usually done in the modality against payment.
- Agent bank : It is the bank that is in charge of the settlement of the promissory notes with the market where they are listed.
- Legal advisor: Specialized law firm.
- Rating agency: It is the independent rating agency.
Calculating the price of a promissory note
When calculating the price of a promissory note, one of these formulas should be used:
- Simple interest formula : For notes with maturities of less than 365 days:
Price = nominal / (1+ interest rate * number of days until maturity / 365)
- Compound interest formula: For notes with maturities greater than 365 days:
Price = nominal / (1+ interest rate) number of days until maturity / 365