A corporate bond is a loan from many investors at once, on one standard set of terms. For a business with predictable cash flow and something to secure against, it can raise more, from more people, than negotiating notes one at a time.
It is also more formal, more expensive to set up, and considerably less forgiving of a mess.
What distinguishes it from a loan note
A loan note is bespoke. Terms are negotiated for the situation and often differ between holders.
A bond is standardised. Every investor buys the same instrument on the same terms. That is what makes it scalable, and it is also what makes it rigid — you cannot quietly agree something different with one holder without affecting the whole issue.
What has to exist first
Cash flow that services the coupon
A bond obliges you to pay a fixed amount on fixed dates. Not from profit, from cash.
Model it against a downside case rather than the plan. If the coupon is only serviceable if the plan works, the instrument is wrong.
Something to secure against, or a very good reason not to
An unsecured bond from a business without a long track record is a hard sell, and the rate demanded usually makes it uneconomic.
If it is secured, the whole chain must be documented: which asset, independently valued and dated, held by a security trustee, ranked against existing charges.
A clean capital structure
Existing lenders come first. Find out what charges are already registered and what consents your current facilities require. Discovering a negative pledge halfway through an issue is expensive.
Governance that bears inspection
Filed accounts up to date, directors’ records clean, the public register matching the documents. Bond investors check, and they check early.
The pieces of the transaction
- The offer document. Full terms, use of funds, risks, financials, the issuer’s position.
- The trust deed or instrument. The legal architecture, including the security and who holds it.
- A security trustee. Independent, acting for holders, with the power to enforce.
- A registrar and paying agent. Someone has to maintain the register and pay the coupon on time, every time.
- Professional advisers. Legal counsel on the instrument, an accountant on the financials, a valuer on the asset.
- Distribution. Who is actually going to place it, and with whom.
Listed or unlisted
Listing adds cost, disclosure and process. In return it adds credibility, widens the investor base, and can make the bond eligible for wrappers and mandates that unlisted paper cannot reach.
An unlisted bond is cheaper and faster, and is placed with a narrower group who will look harder at you because no exchange has looked first.
Neither is better. It depends entirely on who you expect to buy it.
The obligations that follow
This is the part founders underestimate. Issuing the bond is a project; servicing it is a permanent operating function.
The coupon is paid on the date. The register is maintained. Reporting goes out on schedule. Covenants are monitored and, if one is going to be breached, holders are told before it happens rather than after.
A missed payment on a bond is not a private conversation with a lender. It is a public event with many counterparties, and it is very difficult to recover from.
The honest test
Two questions, asked before anything else.
Can the business service this out of cash flow if the plan underperforms by a third?
And is there a real, specific source of repayment at maturity — a sale, a refinancing, a cash balance — rather than an assumption that it will be rolled?
If either answer is uncomfortable, the issue is being raised on hope. Bonds are the least forgiving instrument for that.
Related reading
- Bonds or loan notes: which suits your raise?
- Secured vs unsecured bonds
- Refinancing company debt with a bond
Mark Johnson is a Director of BDM Wealth Management, which introduces capital raising opportunities across bonds, loan notes, IPOs and SEIS/EIS. To discuss a raise, get in touch.
BDM Wealth Management is an introduction business and is not regulated. This article is general information, not financial, tax or legal advice, and does not constitute an offer or invitation to invest. Capital is at risk and you may get back less than you invest. For high-net-worth and sophisticated investors only. Take independent professional advice before making any investment decision.