Author: Szabo Ivan
Source: Hospodarske noviny, 11 August 2008, nr. 155, pg. 17

There is no need to go to the bank for money – a stock exchange can help. Company bonds are not mass produced tools for gaining finances and taking out a bank loan is generally easier and cheaper. However, in some cases, a bond issue on the stock exchange is an appropriate method of gaining resources for future company expansion.
To offer more
“If a company wants to issue bonds, it has to ask itself a number of questions. It is important to have given consideration to what use the resources will be put, which investors the company wants to target, how to properly determine the validity and the asset in accordance with the commercial conditions and either to consult on these issues or to cooperate directly with professionals in preparing the issue” calculates Rastislav Velič, Financial Manager of Arca Capital Slovakia.
If the company wants to attract investors to buy its bond, it has to propose terms with an attractive profit. Consequently, company bonds offer a higher valuation than term-deposits or government bonds.
The interest on offer is also related to the so-called risk overcharge. The point is determining which bond investors are willing to accept. This depends on the strength of the financial issuer, the maturity of the bond and the risk margins for bonds in comparison to loans. “The issuer’s rating also acts as a good guide for an investor,” explains Vladimir Sosovicka, member of the Board of Directors of CSOB Asset Management. The level of the risk additional charge also changes over time with changes in the investors’ mood towards risk. A year ago, investors were willing to accept much lower risk additional charges than today at a time of a loan crisis.
Fixed or floating
Bonds’ interest can be fixed or floating, which largely follows the bank-to-bank rates Bribor. For instance, in December Arca Capital Slovakia issued five-year bonds with a fixed annual interest of 8.5 percent. By contrast, in June MATADOR Automotive Vrable issued a three-year bond with a floating rate of 6-month Bribor + 1.1 percent. At present, the half-year Bribor bank to-bank rate is circa 4.3 percent.
A rating, provided for a fee by a rating company, also helps to value a company in terms of risk. Among the issuers of corporate bonds, we can also find some who do not hold or have not requested a rating assignment.
“The additional charge reflects this fact and usually ranges from two to four percent” states Velic.
“It is possible to assert that bank bonds are regarded as more risky than government bonds, but less risky than company bonds,” concludes Stefan Frimmer, spokesman for Slovenska Sporitelna.
Loan and bond
“Taking out a loan in a bank appears to be less complicated and cheaper than a bond issue. However, the differences reside in the use of the funds obtained. The resources from the bond issue can be used for an introductory launch for financing projects, while a bank loan is normally linked to specific financing for an actual project or a plan with an appropriate surety and so the bank resources are in most cases approximately 2.3 – 3.5 percent cheaper,” warns Velič.
The bank puts resources into projects either jointly with the company’s own resources, for instance with resources acquired from a bond issue, or at later point, when the project has reached a phase accepted by the risk management of the bank.
How to buy them
Bulk trading in company bonds on the Bratislava Stock Exchange does not exist; on the developed markets their liquidity is not at such a high standard as in a case of government bonds.
However, company bonds are relatively common in the portfolios of financial institutions. They are often also offered to private investors with a higher level of credibility by way of banks or bond traders.
“Company bonds are not a typical retail financial tool. However, despite that, to investors willing to accept a lower liquidity and a certain credit risk, they carry the potential of a higher profit in comparison with government bonds,” concludes Velič. The opportunity to buy such bonds depends also on their nominal value, which in our country is predominantly hundreds of thousands up to millions of crowns.