Tap Issue (Reopening)

What is a tap sale?

A tap sale, reopening, tap issue, and bond tap are terms used interchangeably to describe a financial maneuver. It involves borrowers selling more bonds or short-term debt instruments from past issues. These new bonds retain the original face value, maturity, and coupon rate. However, they are issued at the current market price instead of being sold at their initial face value. This strategy lets borrowers raise extra funds while keeping the terms consistent with the initial bonds. It’s a way for them to adapt to the existing market conditions and bolster their financing based on their earlier borrowing plans.

How a tap sale works

Once a bond is ready for issuance, it becomes accessible in the public markets for potential lenders and investors. Yet, prior to this issuance, the issuer must grant authorization for the bond to be created. Occasionally, a segment or the entire authorized amount of the bond is retained until the issuer requires the funds that will be generated upon the bond’s sale. When the bond is eventually introduced to the public on a subsequent date, this process is termed a tap issue.

Tap issues serve to sidestep transactional and legal expenses, making them well-suited for modest fundraising endeavors where the costs of fundraising could prove impractical.

Additional placements explained

An additional placement refers to the process of issuing new securities on top of existing bonds at a later time after the initial issuance has taken place. This allows the issuer to sell bonds to raise further funds without creating an entirely new bond series. The additional placement maintains the same terms and characteristics as the original bonds, such as face value, maturity date, and coupon rate.

An additional placement is essentially a way for the issuer to tap into the same bond issue again to secure more financing, leveraging the groundwork laid by the initial issuance.

Occasionally, the issuer employs a bond issue program, outlining the intended borrowing amount. However, the complete specified sum isn’t immediately made available during the initial placement, either by choice or in accordance with market conditions at the time. In such cases, the issuer might opt for subsequent placements of the same asset after a designated time interval.

These additional placements can manifest through auctions (common for government and municipal bonds) or through book-building (underwriting). In practice, scenarios arise where the method for securing additional funds might differ from the approach used in the initial placement.

Moreover, additional placements can encompass various types of issues, encompassing discount bonds, coupon bonds, and Eurobonds.

Benefits of tap sales

A tap issue commonly involves a government security, often in the form of a Treasury bill. In this process, the borrowing entity, usually a government, announces the availability of the security and invites bids within a specified timeframe. The security is either sold at a fixed price or at a price determined by the demand it garners. If the price remains fixed, the security’s value won’t increase in the secondary market. Consequently, the issuer might end up paying a higher yield than necessary.

With a tap issue, the government borrows funds over a span of time rather than through a single auction sale. This strategy enables the government to introduce the bonds to investors during the most favorable market conditions. It’s a beneficial approach for issuers, ensuring prompt access to funds.

During a bond tap, the issued bonds share the same terms—such as face value, maturity date, and coupon rate—as the original bond series. Despite being sold at their current market value, these bonds are issued under those consistent terms. If the bonds are trading favorably in the open market, the issuer can offer them at a premium above their par value. As premium bonds have lower yields than discount bonds, the borrowing entity gains an advantage by offering a reduced return to investors.

Moreover, by maintaining uniform terms in this way, the issuer can uphold covenants, redemption schedules, and interest payment dates.

Example of a tap sale

Tap issues are frequently employed in U.S. Treasury securities. To illustrate, the U.S. Treasury released 10-year notes in the months of February, May, August, and November in 2021. Each initial issuance was followed by a reopening after one month, and subsequently, a second reopening was scheduled two months post the original issue. Additionally, in April and October of the same year, the Treasury introduced five-year Treasury Inflation Protected Securities (TIPS). After each initial issuance, a new tap issue was planned to occur two months later.