Harmony with Financial Markets. Bond Markets

Even if you are a private company, you may still have to deal with financial markets. It will happen if you decide to issue corporate bonds to professional investors.

Why you might want to do that? Because for some of your projects – especially the large ones – this form or financing might be preferable to getting a loan from an individual lender – or even a syndicated loan from a group of lenders.

For example, they might find your project too risky, while for some professional investors (individuals or institutions) buying your high-yield bond could be a perfectly acceptable investment. Or bond issue will simply offer better terms – and thus will generate higher financial value for your shareholders.

In this case – when you issue a bond – you will definitely have to deal with these professional investors. And due to an inherent (and very serious) complexity of this project, you will most undoubtedly have to deal with financial advisors – investment banks, most likely – who will actually sell (‘place’) your bonds to these investors.

However, investors in high-yield (‘junk’) corporate bonds tend to be pretty sophisticated (otherwise they will lose all of their money – and fast). Therefore, they will do their own research. Talk to you and your managers and employees; industry and corporate analysts in investment banks, market research and consulting companies and in other organizations.

Financial markets are usually pretty seriously regulated – to avoid serious financial and economic crises (both local and global). Therefore, you will most likely have to deal with government regulatory agencies.  

What would you want from your bond investors? Basically the same thing as you would from an individual lender (in real life your bond issue will essentially be a form of a syndicated loan provided by individual investors and investment funds).

You want to sell your bond issue that will make it possible for you to execute a corporate project that will create a substantial amount of financial value for your shareholders.

And to issue your bonds on the terms (size, duration, payment schedule, coupon payments, real interest rate, etc.) that will optimize your KPI for your project: minimize breakeven point and payback period and maximize NPV, IRR/MIRR and economic profit. Obviously you make sure that this is, indeed, the case.

Which requires a solid and accurate financial model developed by a competent and experienced analyst. This is one thing that investment banks are especially good at.

Second, bond investors often offer valuable advice on various aspects of corporate financial management. Valuable for both sides – for you this advice can make a noticeable amount of money (usually by saving it); for your lender it will decrease their lending risk. That’s also financial value right then and there.

Desired functional value is also quite obvious. First and foremost, you want to execute the project that your finance by issuing corporate bonds to create something useful (functionally valuable) for your company. Manufacturing equipment, ERP software, new fleet of trucks, etc.

As for emotional value, you would want to be treated well by your bond investors and in general enjoy the experience of working with them. Believe it or not, some of them can actually be quite nice.

Now what you can do for your bond investors. First and foremost, make money for them by paying interest (making coupon payments) and repaying the principal. This is financial value. In terms of functional value, you create it by doing what your lender wants you to do.

Mostly it is (1) supplying your investors – on a timely basis - with all accurate and up-to-date information needed to monitor your project and the bond issue and (2) consult them before making and executing major decisions that may have a significant impact on your project and thus the bond issue.

In terms of emotional value, your investors wants you to make him (or her) emotionally comfortable and to generally treat him/her well. The first is taken care of by transparency created by the project information you send to your lender; the second requires an efficient communications campaign.

What would you want from an investment bank? To place your bonds with professional investors at the most attractive financial terms. That’s financial value. In addition, investment bankers almost always offer highly valuable advice on various aspects of corporate financial management. Advice that increases the performance and financial value of your company – and thus the chances of your financial advisor to successfully place your bond. And to get their commission.

Now functional value. One aspect is to select investors that are the best ‘fit’ for your company. Believe me – it is much more important that you might realize. In terms of all aspects of aggregate value.

The second aspect is performing most (if not practically all) functions needed for a successful bond placement. Developing a valuation model, writing and information/investment memorandum, preparing and making presentations to investors, conducting negotiations with investors, etc.

As for emotional value, you would want to be treated well by your investment bankers and in general enjoy the experience of working with them. And believe me, these characters are very, very good in this department.

Now what you can do for your investment bankers. First and foremost, make money for them by paying their commission. Which for a high-yield (‘junk’) bond can be pretty hefty and will noticeably increase your effective interest rate. This is financial value.

In terms of functional value, you create it by doing what your investment banker wants you to do. And believe me, you must always, at all times follow the requests of your investment bankers to the letter. Provide them with comprehensive, timely, relevant and accurate corporate information – whatever they request. And definitely consult them before making and executing major decisions that may have a significant impact on your upcoming bond issue. In bond placement business, a surprise can easily kill the deal.

In terms of emotional value, your investment bankers wants you to make him (or her) emotionally comfortable and to generally treat him/her well. The first is taken care of by transparency created by the project information you send to your lender; the second requires an efficient communications campaign.

What would you want from the analysts? To supply prospective bond investors with favorable – but accurate – information and analysis, that will motivate the latter to (1) buy your bonds and (2) do it on attractive terms.

How to make it happen? To supply the analysts in question with your accurate corporate information, structured and packaged (visually and emotionally) in such a way as to maximize the chances for a favorable analysis, conclusions and recommendations. A ‘2-in-1’ package of functional (content) and emotional (structure and style) value. Typically, this is done by your investment bankers – this is a part of their job.

What would you want from government regulators? With private placement, you do not have to get the government approval. If your placement conforms to so-called Regulation D, you do not even have to register it with the Securities and Exchanges Commission (SEC). So the only thing you have to worry about is to make your issue meet Regulation D requirements. This is again, the job of your financial advisor.