Tap Issue

A tap issue is a procedure that allows borrowers to sell bonds or other short-term debt instruments from past issues. The bonds are issued at their original face value, maturity and coupon rate, but sold at the current market price.

A tap issue is also referred to as a bond tap or tap sale.

When a bond is issued, it is made available in the public markets for lenders and investors to purchase. However, before a bond can be issued, it has to be authorized first by the issuer. Sometimes, a portion or the full amount of bond that is authorized is held back until the issuer needs the funds that the bond will provide when sold. When the bond is issued to the public at a later date, it is referred to as a tap issue.

A tap issue is usually a government security, such as a Treasury bill. The borrowing issuer announces the availability of the issue and accepts bids for a specified time period. The issue is sold at a fixed price or for a price dependent on the demand for the debt instrument. If the price is fixed, the security will not appreciate in price in the secondary market and, thus, the issuer will be stuck paying a higher yield than would otherwise be necessary.

With a tap issue, the borrowing governmental body issues bonds over a period of time, rather than in one auction sale. A tap issue allows the government to make the bond available to investors when market conditions are most favorable. It is also an attractive mechanism for issuers as it provides for timely access to funds. The bond tap is sold at the current market value on their issuance dates, but issued under the same terms – face value, maturity date, coupon rate, and CUSIP/ISIN number – as the initial series of bonds. Since the bond is priced at its market value, an issuer is able to offer the bonds at a premium to par if the bonds are trading attractively on the open market. And since a premium bond has a lower yield compared to a discount bond, the borrowing issuer will be at an advantageous position as it would be paying a lower return to investors. Furthermore, by offering a bond with the same terms as its initial series, the issuer can lock in covenants, redemption schedules, and interest payment dates.

This method of issuing additional debt was adopted by the British and French governments. Tap issues allow an organization to avoid certain transaction or legal costs and expedite fund raising. The issuer bypasses many of the initial formalities surrounding a bond issue, such as the prospectus, and proceeds to auction off the new securities. Issuing on tap is often suited for smaller fund-raising attempts, where the cost of a new issue is too high when compared to the amount borrowed.