As banks continuously reassess their lending policies, corporates are increasingly seeking alternative financing options, turning to bond issuance as a source of longer term finance.
There are other potential advantages companies consider such as cheaper borrowing costs, but there are other attractions:
Diversification of funding is one attraction. The banking sector’s approach to lending can sometimes be uncertain. Therefore, for some capital-intensive projects where returns on investment will be gotten over time, bond issuance comes as a perfect choice. It can be used to replace bank finance and can also be used to provide long-term working capital.
Bonds can also be issued to match the assets for which the funding is required. If a project will take five years to be profitable, a five-year bond can be issued to provide the necessary interim finance. A bond can also be issued to mature with the full depreciation of a particular asset.
In other words, because the issuer can set the terms and conditions of the bond, the issuer can tailor it towards the company’s needs. More importantly, funding through a bond issue will not be subject to renewable credit lines.
And, yes, bond issuance can be a cheaper way of raising finance.
In 2014, Helios Towers Nigeria needed to raise funds, but it ignored the banks and raced to the international capital markets. Its $250m bond, which the company wanted to use to finance the purchase of telecom tower masts for use in Nigeria’s growing telecoms sector, was the country’s first-ever corporate issuance outside the banking and oil sectors.
In 2016, Eczellon Capital arranged a N50 billion Medium Term Note / Project Bond programme with a five-year tenor and 17.5 percent interest for one of its clients Visionscape Group. The first series was successful, with N28 billion ($92 million) raised. Visionscape, an environmental utility group had been hired by Lagos State (Nigeria) to run its Cleaner Lagos Initiative, a program aimed at improving the management of solid waste in Nigeria’s most populated city. Visionscape required significant financing to make it happen and contacted Eczellon Capital for advice. Out of all the possible financing instruments, the bond programme was agreed perfect for the project.
We (Eczellon Capital) knew that for any bond issue to be successful, it has to attract the interest of institutional investors. Here’s what they look out for:
Credit risk of borrower
However, don’t forget to always speak to your financial adviser about available investment opportunities in the fixed income market.