Tap Issue

An embedded tap issue right is an embedded derivative that gives the issuer of a bond the right to increase the outstanding notional amount of an existing bond by issuing additional tranches under the same contractual terms as the original instrument.

The tap issue right is embedded in the bond documentation and cannot be traded separately from the host contract. Economically, it provides the issuer with flexibility to raise additional funding without issuing a new bond, subject to predefined conditions.

How Embedded Prolongation Rights Work

A tap issue right allows the issuer to issue additional notional:

• At predefined dates or during a defined tap window
• Under the same coupon, maturity, and structural terms
• Often at or close to the original issue price

If the tap issue right is exercised:

• The total outstanding notional of the bond increases
• Existing bondholders are typically diluted on a proportional basis
• The issuer raises additional funds without renegotiating documentation

Tap issue rights are common in medium-term note programs, public sector funding, and structured debt issuances.

Economic Purpose of Tap Issue Rights

Tap issue rights are primarily used to:

• Optimize funding flexibility
• Reduce issuance and documentation costs
• Take advantage of favorable market conditions
• Increase liquidity of an existing bond line

From an economic perspective, a tap issue right gives the issuer an option on future funding conditions, allowing it to issue additional debt only if market terms are attractive.

Numerical Example: Tap Isse Right

Assume a bond with the following terms:

• Outstanding notional: €100 million
• Coupon: 3.0% fixed
• Remaining maturity: 6 years
• Tap issue right: Up to €50 million additional notional
  
  

Scenario A: Market rates decline

Market yield for comparable new issuance: 2.0% Issuing a new bond would require a lower coupon, but the issuer can issue additional notional at 3.0% under the existing bond terms. The tap issue right is economically attractive, and the issuer is likely to exercise it.

Scenario B: Market rates increase

Market yield for comparable new issuance: 4.5% Issuing additional notional at 3.0% would be unattractive to investors or require pricing adjustments. The issuer is unlikely to exercise the tap issue right.

Key takeaway

The value of the tap issue right arises from the issuer’s ability to choose whether or not to issue additional notional, depending on prevailing market conditions.