Infrastructure bond — a new financing option
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.
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.
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.