3 questions to smart minds
Photo: M. Wenner | GCI Management Consulting

Infrastructure bond — a new financing option

For this 3 questions to M. Wenner

GCI Manage­ment Consulting
Photo: M. Wenner | GCI Manage­ment Consulting
12. June 2013

Custo­mi­zed bonds are beco­ming more and more fashionable. They substi­tute bank loans at often better condi­ti­ons. For exam­ple, the cities of Nurem­berg and Würz­burg are plan­ning a joint bond with a volume of 100 million euros and a term of 5–7 years. The aim is to attract insti­tu­tio­nal inves­tors. Energy compa­nies in the wind, solar and photo­vol­taic sectors are alre­ady bond profes­sio­nals. Now a first bond from the infra­struc­ture sector is announ­ced, from the district heating company sector. What about colla­te­ral here? And which inves­tors are being addressed?

For this 3 ques­ti­ons to Mana­ging Part­ner GCI Manage­ment Consul­ting in Munich

1. Listed bonds are beco­ming inte­res­t­ing for very diffe­rent compa­nies. They are advi­sing one of the first infra­struc­ture bonds expec­ted to be issued in July. Which compa­nies can this be and what are the advan­ta­ges bi

The market for SME bonds has been expe­ri­en­cing strong growth for more than two years now, and we are seeing compa­nies from various indus­tries with a wide range of issuing concepts taking the plunge into the capi­tal market. Issuers with their own exis­ting infra­struc­ture — e.g. energy utili­ties, provi­ders of trans­port infra­struc­ture or network provi­ders — are still an excep­tion here, although they often offer the opti­mum condi­ti­ons for fixed-income secu­ri­ties such as a bond: an estab­lished busi­ness model with constant demand and ther­e­fore easily predic­ta­ble cash flows, as well as assets that can serve as collateral.

In times when banks are beco­ming incre­asingly rest­ric­tive in gran­ting loans and in some cases consider­a­bly limi­ting the ability of compa­nies to act, a bond offers a very good alter­na­tive as a buil­ding block in the over­all finan­cing concept. Although the inte­rest rate paid by issuers to bond­hol­ders is gene­rally higher than the inte­rest rate on a bank loan, entre­pre­neurs have a number of other advan­ta­ges. In parti­cu­lar, the final matu­rity of the bond and unchan­ging bond condi­ti­ons over the entire term decisi­vely increase the compa­nies’ ability to act, which can result in signi­fi­cant compe­ti­tive advan­ta­ges. In addi­tion, the company is making itself known to the public via the capi­tal market and can thus raise its profile.

2. How safe is an infra­struc­ture bond? What are the risks? For which infra­struc­ture projects is a bond suita­ble in principle?

Unfort­u­na­tely, it is not possi­ble to make a blan­ket state­ment on the safety of an infra­struc­ture bond. For the valua­tion of a bond, the issuing company first plays the essen­tial role, which must be conside­red indi­vi­du­ally in each case, taking into account various factors, such as the busi­ness model, the secu­rity and predic­ta­bi­lity of the cash flows, etc. The bond’s value is deter­mi­ned on the basis of the bond’s market value. In the case of compa­nies with their own infra­struc­ture, it is a good idea to use valuable assets as colla­te­ral for the bond­hol­ders in order to reduce the inte­rest burden for the issuer.

Recently, it has been obser­ved that more and more bonds with colla­te­ral concepts are being issued. Basi­cally, howe­ver, it should also be noted at this point that colla­te­ral concepts differ greatly and each must be analy­zed in great detail before subscrib­ing to a bond. Colla­te­ral is only used to service bond­hol­ders’ claims if the issuer defaults or defaults on payment. In the event of a payment default, the trustee’s ability to inter­vene and the value and realiza­bi­lity of colla­te­ral are decisive. Colla­te­ral that cannot be reali­zed in case of doubt has no value for a bondholder.

3. Which inves­tors are being targe­ted here? Do we have more infra­struc­ture bonds coming soon?

The stock exch­ange segments for Mittel­stands­bonds all provide for a private inves­tor-friendly deno­mi­na­tion of 1,000 euros, making these secu­ri­ties inte­res­t­ing not only for tradi­tio­nal insti­tu­tio­nal and semi-insti­tu­tio­nal inves­tors and family offices, but also for private inves­tors. Depen­ding on the level of aware­ness of the issuer, the design of the bond and the choice of place­ment and commu­ni­ca­tion chan­nels, between 60 and 80 percent of the issue volume is usually subscri­bed by profes­sio­nal investors.

Whether infra­struc­ture bonds for SMEs will become estab­lished will depend, among other things, on the success of the pioneers — compa­nies like this one, which we are follo­wing at the moment. We think that hedging concepts will become more and more preva­lent in the market for SME bonds. We see oursel­ves as pioneers here with inno­va­tive concepts.

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