Untitled design 4 2 Why Are Companies Issuing Corporate Bonds to Raise Funds?

India’s bond market is thriving and growing. As of November 2022, hundreds of bonds are listed on both the BSE and NSE. And this is a good thing, not only for the country’s economy but also for its business borrowers.

An active bond market enables institutional investors to create financial assets. It also helps to dissipate risks from the overburdened banking system, thereby mitigating financial shocks and contributing to the economy’s financial stability.

From the perspective of Indian corporates, bonds can provide an efficient and cost-effective source of funding. What about bank loans and equity? Why is issuing bonds often a more attractive proposition than either of these instruments? Keep reading to know more!

Corporate Bonds Explained

corporate-bonds

Companies issue bonds to borrow money from an individual or institutional investors who are known as bondholders. By purchasing a corporate bond, the holder agrees to lend the issuing company a certain amount of money for a specific period at a fixed rate of interest. When the bond reaches its maturity date, the investor gets their entire principal back. At this point, they have also earned additional returns due to periodic interest payments (also known as coupon yields).

When the issuer issues the bond, they also declare its “face value.” Also known as the bond’s nominal value or par value, it refers to the amount the bondholder will get once the bond reaches maturity, as long as the issuer doesn’t default.

Of course, the bond’s face value doesn’t reliably indicate its actual market value because bonds sold on the secondary market fluctuate due to supply, demand, interest rates, and other factors. That’s why in the secondary market, a bond may be available at a price lower than the face value, in which case, it is said to be sold at a discount (below par). On the other hand, if the asking price is higher than the face value, the bond is sold at a premium.

Raising Funds for Business: Bonds v/s Bank Loans

Indian companies have many options when it comes to borrowing funds. One of the most popular options is a bank loan. Most Indian banks offer many types of loans to companies, including business loans, term loans, and working capital loans.

Some also offer specialised loans, such as startup loans, small business loans, loans against property (LAP), and point of sale (POS) loans. These loans can be secured (require collateral) or unsecured (no collateral required), and their interest rates, tenures, and repayment schedules can vary depending on the following:

  • Bank
  • Borrower’s credit history and creditworthiness
  • Amount borrowed
  • Loan purpose
  • Secured or unsecured 

Bank loans may not always be the best option for business borrowers.  One problem is that they place certain higher restrictions or covenants on companies in exchange for providing funds. For example, they may ask the company not to issue more debt until it has repaid its existing loans in full. Such restrictions can hamper the organisation’s ability to do business.

There may be lesser restrictions on bonds. By issuing bonds on the open market, a company may have relatively more freedom to operate in its own way while also raising money to finance day-to-day operations, fund a new project, expand into a new market, etc. In addition, bonds can lower companies’ long-term or short-term funding costs.

This is because there are more chances of lower interest on bonds than the interest they would pay a bank. The money saved can add to their profits and strengthens the bottom line, which, after all, is every company’s goal.

Raising Funds for Business: Bonds vs. Equity

A bond is a debt-financing instrument. Companies can also borrow money by issuing stock, aka equity. With this instrument, the money does not have to be repaid to investors. However, when a company issues shares of stock, they also grant proportional ownership in the firm to every investor.

Not every company wants to do this because ownership equates to control (at least to some extent). Here’s where bonds can be a suitable financing option.

By issuing bonds, the company does not have to slice up its equity in exchange for investors’ funds. Instead, it slices up its debt and sells it to investors in smaller units.

Each investor holds these units and lends the firm money equivalent to the value of each unit. For instance, a Rs. 1 lakh debt issue may be allocated to 100 units of Rs. 1000 bonds. The firm makes periodic interest payments and also repays investors their principal when the bond matures. This is often a small price to pay in exchange for retaining full control over the company.

Another drawback of equity is that the more stock shares that are in circulation, the lower the value of each owner’s shares. This can also lead to a drop in earnings per share (EPS), so owners earn less returns on their investments. If the EPS continues to decline, it may indicate that the firm’s financial health is deteriorating, which is not a favorable development by any means.

Other Advantages of Raising Funds Through Bonds

We have already seen why issuing bonds can be a better funding option than bank loans and equity. Here are the other advantages of raising funds through bonds:

1. Source of Ready Cash

Bond issuance is a good way to access ready cash and get a short-term capital boost, especially if the company has a good reputation and is trusted by potential lenders. This is because it can attract a large number of lenders in an efficient manner and a short time.

2. Low-Cost Source of Funds

As we saw earlier, raising funds through bonds may be cheaper than getting a bank loan. The company can further lower its borrowing cost by issuing debt at lower interest rates. These lower rates are very much possible if the bond gets a good credit rating from a credit rating agency like CRISIL or ICRA and if the company can show consistent earnings potential and robust fiscal health.

3. Flexibility of Bond Types

Firms have the flexibility to offer many types of bonds, depending on their requirement and what they can offer to investors. For example, they can issue collateralised debt obligations (CDOs), unsecured bonds, or callable bonds.

Some companies issue convertible bonds, which give bondholders the right to convert the bond into shares at certain times during the bond’s tenure or on its maturity. Others issue non-convertible bonds (NCDs).. On the other hand, these bonds don’t allow holders to convert their holdings into equity, so the company continues to retain full control over its equity.

4. Easy Record Keeping

When a bond is issued, all bondholders get the same interest rate, tenure, and maturity date, regardless of the amount invested. In short, they all get the same deal. All of this simplifies recordkeeping for the issuing company.

Yubi Invest: Simplifying Bond Issuances and Investments through Technology

India’s bond market offers many ways for companies to borrow funds fairly easily and at a reasonable cost. Over the past couple of decades, the Indian government, the RBI, and SEBI have stepped up their efforts to develop the country’s corporate bond market.

Technological advancements, particularly around digitisation and automation, have also made it easier for companies to issue bonds and access much-needed funds. YubiInvest is at the forefront of these developments.

YubiInvest facilitates seamless fixed-income transactions between borrowers and investors. Whether you are a wealth partner or an HNI/family office, the platform can help you access the best investment choices for your needs. And if you are a bond issuer, YubiInvest will help you raise capital and meet your debt requirements in the most seamless manner.

YubiInvest is also a consultant that will support you through your entire borrowing journey. It will understand your unique needs and recommend the most effective means to raise funds. It will even structure the deal and take care of all regulatory and compliance requirements. And that’s not all. YubiInvest will also create and fulfill demand and manage the entire transaction lifecycle from start to end.

The Yubi team works with the topmost and largest wealth distributors and family offices in India to ensure adequate consumption of issuances. We also bring rich expertise in the fixed-income securities space and can, therefore, tailor-make issuances to suit investor demands and ensure win-win outcomes for all parties involved in every bond transaction.

Get started with Yubi Invest for free. Click here.

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