Governments and major corporations around the world issue their own bonds to raise capital for major projects but what are the risks for the issuer and what are the best ways to secure the funding you need?
By Jacquelene Pearson*
Did you know that 2022-23 was one of the worst years on record for the performance of corporate bonds? Inflation driven fears about major economies falling into recession, defaults by bond issuers, including globally recognised brands, and interest rate movements were the major reasons for the bond market shakeup.
The collapse of globally recognised bond issuers, including Credit Suisse, also put the nerves of bond investors and regulators on edge in recent years.
Since 2022, many countries, including the Vietnamese Government, have introduced new rules to improve the transparency and sustainability of their bond markets. Governments were forced to act following a run of defaults by bond issuers and resulting losses by non-professional investors who didn’t fully understand the risks.
From 1 January 2024, in Vietnam, bond issuers have been required to have a credit rating by a credit agency licensed by the Ministry of Finance if the face value of bonds issued in a 12 month period is greater than $US21 million and 50% of its equity; or the total outstanding face value of an issuer’s bonds is greater than 100% of its equity.
On 1 January new criteria were introduced by Vietnam’s government on individual professional investors along with changes to distribution periods. These are the latest changes in a range of new regulations including the tightening of bond terms and conditions, limiting the purposes bond proceeds can be used for, and new legal requirements for bond investors.
In other words, issuing your own corporate bonds as a way of raising capital can be a complex and risky business. Traditionally, bonds have been the territory of institutional investors – parcels have started at a minimum of $500,000. Now, in some countries with mature bond markets, including Australia, there are bond funds that bundle corporate offerings and on-sell them to retail investors, starting at a more modest minimum of $10,000, for instance. Other markets, including Vietnam, are still at the stage of ‘emerging’ bond markets.
Bonds become popular when other forms of income producing investments, such as shares with dividends or even term deposits, are performing poorly. If you want to issue a corporate bond and raise the amount of money you need you have to offer an interest rate that is higher than bank deposits and dividends.
For example, even bonds and bond funds marketed to retail investors are currently offering rates upwards of 6%, depending on the risk the investor will be exposed to. If you are going to successfully issue corporate bonds you will need to be able to guarantee that you will have enough cashflow to meet the monthly income payments you are offering your investors.
Your company will also need to have enough capital in reserve or on hand to repay the principal or face-value that each investor commits when the bond matures. Over the years corporate bonds have been the downfall of many well-meaning companies, particularly in circumstances where long-term capital-intensive projects are mismatched with the short-term requirements to deliver regular income payments to investors and cope with unexpected redemptions if markets change rapidly.
Carefully consider all the risks involved before you decide that issuing bonds is the best way to meet your financing needs.
For instance, when Acuity Funding does use a bond issuance to raise funds, we make sure our bonds are fully insured. This is our way of maximising transparency and minimising risk.
We realise that many businesses remain trapped in bonds that are now insolvent. Acuity Funding can structure an exit strategy that will minimise losses for all parties.
Innovative funding solutions are available that are less complicated than corporate bonds, protect your organisation and protect against market volatility, and give you the peace of mind needed to deliver major, long-term projects.
Acuity’s reputation as an organiser of private debt continues to grow. If you require a large amount of funding (upwards of $100 million) for an industrial park development, for instance, we can arrange up to 60% on improved valuation.
Our typical loan periods are between 20 and 40 years and include repayment grace periods. If that sounds like less pressure than issuing your own corporate bonds, please consider contacting Acuity to find out more.
*Jacquelene Pearson is Acuity Funding’s content editor