AS POLITICIANS and economists continue to grapple with some of the biggest financial and structural challenges in a generation, the picture is not all doom and gloom across corporate Britain.
Many businesses are enjoying considerable success in creating new and profitable revenue streams but, more often than not, growth requires capital. While venture capital, bank finance or an initial public offering (IPO) to take a company public may be an option, one that is frequently overlooked is a bond issue, which offers direct access to capital markets.
A bond issue may be an alternative where the business strategy requires a financial injection to fund growth or expansion into new markets. Alternatively, it could support a specific project. The process for such private placements is well developed, with significant amounts flowing through the markets on an annual basis, backed by a vast wholesale or retail investor base.
Before assessing the bond option, such businesses may have run the rule over venture capital but perhaps found this too pricey and short-term, while bank debt may have been be difficult to secure, particularly for younger businesses. Likewise, taking the stock market route, through an IPO, may have been rejected because of high costs and the loss of control. Again, this background a private placement, either in the UK or perhaps the US, could provide a straightforward means of raising finance.
A key factor to consider is the overall cost. Is a bond issue competitive compared to alternative forms of finance and would the bond sit comfortably as part of the business’ overall funding arrangements? Invariably, a bond issue will be only one of a series of financing arrangements required for a business, but offers a flexible addition to the more common options.
In practice, the capital markets operate as a conduit, linking businesses looking for finance with investors requiring secure income streams. This covers a huge spread. Right at the top of the tree are multibillion-pound international bond programmes, often secured over pools of mortgages, personal loans and credit card receivables. However, the markets deliver much more than that and offer a range of more common products and solutions for businesses seeking finance. This stretches from bond issues listed on the London Stock Exchange, requiring a minimum issuance of £250m, through to unlisted private placements and retail offerings.
While documentation can initially appear intimidating for new participants, the underlying concept is consistent and straightforward. There are obvious similarities to a term loan arrangement, which involves the provision of a loan advance, due to be repaid with interest, over a fixed term. In the case of a bond issue, the business sells a future income stream, either from its trading profits or specific assets, against upfront receipt of a capital sum.
There is a growing trend for smaller bond issues. While the overall cost falls relative to the increasing size of the transaction, more streamlined and simplified disclosure and regulatory requirements have resulted in smaller issues becoming more attractive. For example, a straightforward private placement may well work below £100m, while a retail bond, which may be sold to retail investors rather than wholesale investors, could work at £50m or less.
A common misconception is that all bond issues require an official rating, for example from Standard & Poor’s or Moody’s. While this may be correct for a listed bond, it may not necessarily be required for a private placement. However, the rating of the placement itself may be required and could also provide a form of credit enhancement to attract investors.
This is not necessarily a complex issue and the costs involved would normally be subsumed into the overall costs of the bond issue. Once a bond line has been set up, further taps under it are generally straightforward and can be for much lower amounts than the initial issue.
Bond finance does not just provide a potential solution for corporates. It is a popular option for public sector and quasi-public sector entities, particularly those able to identify long-term income streams. These could come from property rents, ticket sales and a multitude of other sources. All that is required is an open mind as to what can be covered. Think, for example, of David Bowie, who issued bonds against future album sales!
The last few years have forced many corporates to take a fresh look at the cost, availability and ease of access to funding. With direct access to capital markets, historically limited to a small number of very large organisations, becoming an increasingly viable option, businesses with a credible business plan, management and track record should consider whether a bond issue could offer an appropriate means of raising finance.
Chris Dun is a banking and finance partner and Stuart Fitzsimmons is a senior associate in the banking and finance team at Maclay Murray & Spens LLP
Mark McMullen joins the private client services team from Smith & Williamson
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