Many growing companies carry debt that made sense when they took it and makes little sense now. A short-term bridging loan that was meant to last six months. A string of asset finance agreements at different rates. An overdraft that has become permanent. A bank facility that is up for renewal just as the bank’s appetite for the sector has cooled.
Refinancing replaces that borrowing with something better suited to the business. A bond is one of the main ways to do it. Structuring and refinancing company debt is the core of what our partners and directors have spent their careers on, and the same patterns come up again and again.
Why refinance at all
There are usually four reasons, and most refinancings involve more than one.
- Cost. Replacing expensive short-term money with cheaper, longer-term money.
- Term. Pushing repayment out so that the business has time to generate the cash, rather than facing a cliff edge every year.
- Simplicity. Consolidating several lenders, rates and covenant packages into one instrument the finance team can actually manage.
- Freedom. Removing restrictive bank covenants that limit investment, acquisitions or dividends.
Why a bond rather than another loan
A bank refinance is the default and should always be tested. A bond becomes attractive when the bank route is not available on sensible terms, or when the business wants something a bank will not offer.
Bonds can typically offer a longer fixed term, a fixed coupon that does not move with base rates, interest-only payments with capital repaid at maturity, and a lighter covenant package. They also broaden the pool of lenders from a single bank to many investors, which reduces dependence on one relationship.
The trade-off is cost and process. A bond usually costs more in interest than senior bank debt, and it requires proper documentation, investor materials and, where applicable, regulatory approvals or exemptions in each market where it is offered.
When it works
Refinancing with a bond works best when:
- The business is profitable, or has contracted or highly visible cash flow that comfortably covers the new interest.
- There are assets that can support security, which improves pricing. We explain what investors check in secured vs unsecured bonds.
- The existing debt is genuinely more expensive, shorter or more restrictive than the bond would be.
- There is a clear plan for repaying the bond at maturity, whether from cash flow, an asset sale, a further refinancing or a listing.
When it does not
A bond is not a rescue instrument. If the company cannot service its current debt from trading, replacing that debt with a bond usually just moves the problem to a new group of creditors. Investors are alert to this, and a refinance that looks like a rescue will struggle to raise, or will raise only at a price that makes things worse.
The other failure is timing. Starting a refinance three months before an existing facility expires leaves no room to negotiate. The strongest refinancings start twelve to eighteen months ahead, while the company still has options.
How the process runs
The detail varies by jurisdiction and size, but the stages are consistent:
- Diagnosis. Map every existing facility: amount, rate, term, security, covenants, early repayment penalties.
- Structure. Decide the size, term, coupon, security package and repayment plan for the bond, and how existing lenders will be repaid and their security released.
- Documentation. Prepare the bond instrument, security documents, trustee arrangements and an information memorandum or prospectus, as the rules in each market require.
- Distribution. Introduce the bond to suitable investors in the jurisdictions where it can lawfully be offered.
- Completion. Close the issue, repay the old lenders, release and re-grant security, and begin reporting to bondholders.
Bonds, refinancing and listings
A refinance and a listing are often part of the same plan. Some companies use a bond to stabilise the balance sheet ahead of an IPO. Others list precisely so that they can raise equity to clear debt. We look at that second route in taking a company public to clear debt.
Questions to answer before you start
- What does every existing facility cost, and what does it cost to exit early?
- Can the business service the new coupon at a lower level of trading than forecast?
- What assets are available as security, and who currently holds charges over them?
- How will the bond be repaid at maturity?
- In which countries are the likely investors, and what rules apply to offering the bond there?
A company that can answer those clearly is usually in a position to refinance on its own terms, rather than on the terms its current lender decides to offer.
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. Tax treatment depends on individual circumstances and may change. For high-net-worth and sophisticated investors only. Take independent professional advice before making any investment decision.