Corporate bond

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A corporate bond (also corporate bond , corporate bond or corporate bond ; English corporate bond ) is a bond of an emissive industry - trade - or transport company .

General

By type of issuer , there are government bonds , municipal bonds , bank bonds , mortgage bonds and corporate bonds. Apply as issuable Prime Standard of the Frankfurt Stock Exchange all large companies that a financing need volume of at least 100 million euros, according to the international accounting standard IFRS accounted for and a good credit rating to prove. These large companies can cover their capital requirements as part of external financing by issuing simple corporate bonds , bonds with warrants or convertible bonds . For this they hire a rule under the Foreign Mission banks that structure the capital requirement to an issue and that by going public on the capital market or through private placement issue .

In addition to the classic bond with fixed interest payments and a fixed term ( standard bond ), various forms of corporate bonds have developed in recent years.

history

The first corporate bonds were apparently issued by the United East India Company, founded in March 1602, and the Dutch West India Company , founded in June 1621, on the Amsterdam Stock Exchange . The Berlin Stock Exchange hereby began about 1850, the Frankfurt Stock Exchange in 1866. In the United States played the capital through corporate bonds despite early recognition as transferable instruments ( English negotiable instruments initially) in 1855 compared to share a rather subordinate role. Mines , railroad and sewer construction companies mainly used this financial instrument in the United States . The increased capital requirements in Germany after 1900 and the issuance of industrial bonds were not only due to increased investments , but also to the replacement of internal by external financing as well as favorable capital market interest rates offered an opportunity for external financing of increased production capacities . It was not until 1923 that the rating agency Standard & Poor’s introduced the rating for industrial bonds, the rating for public corporations followed in 1940.

Bond terms

Legal issues

The bond terms and conditions for corporate bonds are the same as for other types of bond. The bond interest rate for uncovered corporate bonds is usually well above the interest rate of the risk-free interest rate for risk-free government bonds. The reason for this is the dependency of corporate bonds on the earnings power of the industrial company, which is subject to a greater risk of bankruptcy . In the worst case, creditors of corporate bonds must therefore expect their capital investment to fail completely, so that corporate bonds are assigned to risk class E.

By issuing the bond, the issuing company assumes an obligation under the law of obligations to repay the creditor the capital amount made available for a certain period of time against payment of interest. Unless it is a zero coupon bond ( English zero coupon bond ) is that is issuer obliged its investors beyond a fixed rate or variable-rate fee , based on the nominal value to be paid to the corporate bond. The amount of the interest to be paid depends primarily on the creditworthiness of the issuer. Further factors that influence the level of the interest rate are the term of the bond (if the yield curve is normal, this increases with the term), the level of awareness of the issuer and the general interest rate environment . Often, the interest rate is a credit spread ( English spread ) to yield a viewed as risk-free government bond determined by reference.

Unsecured corporate bonds ( english uncovered bonds ) have at least one negative declaration , a cross default clause and a pari passu included. The individual structuring of the bond conditions increases with a poorer rating . While standard conditions apply to bonds with an investment-worthy credit rating, the conditions to high-yield bonds are expanded to include covenants such as collective action clauses , financial ratios (particularly debt ratios ) and credit events .

Business aspects

As an outward indicator of creditworthiness classification a company receives a credit rating from a credit rating agency that it can change over time. If the rating changes, the current price and credit spread of a corporate bond also change , so that rating changes have a significant impact on the yield to be achieved on a bond. By rating a corporate bond, interested investors can better assess the risk of this type of investment.

In general, a corporate bond - compared to shares in the same company - is considered to be a lower-risk form of investment because future cash flows ( debt servicing ) are fixed in advance. Interest is payable regardless of the earnings situation , but dividends are not. The price fluctuations are usually lower for corporate bonds than for stocks. Corporate bonds traded on the stock exchange can be sold at any time and therefore have high market liquidity in normal times .

Components

  • Yield: The yield indicates the annual interest that the holder can expect if he holds the corporate bond until the end of the term. It depends on the purchase and repurchase rate, the remaining term, the fixed interest payments and the general market interest rate .
  • Coupon: The coupon represents the regular (annual, semi-annual, quarterly) interest payments that the issuer pays the investor. In contrast to the return, these are clearly fixed and do not depend on price fluctuations. An exception to this variable-rate corporate bonds (so-called english floating rate notes , short Floater called) is, at which the coupon to a reference rate relates such. B. LIBOR or Euribor . The yield spread determined at the time of issue is then added to this reference interest rate every quarter or six months and represents the coupon for the next interest period.
  • Nominal value: The nominal value is the amount that is repaid at the end of the term and to which the coupon rates refer.
  • Market value: The current market value of a corporate bond is given as a percentage of the nominal value. It is essentially dependent on the general interest rate level. When interest rates rise, the price of a corporate bond falls and, conversely, the price rises when interest rates fall. In addition, the price depends on the creditworthiness of the issuer and the amount of the coupon.
  • Remaining term: It indicates the time until the bond is repaid by the issuer.

emission

  • Third-party issuance: In the case of third-party issuance, a bank or several banks together ( bank consortium ) act as an underwriter and / or placement consortium - also known as a syndicate - as an intermediary. The underwriter (s) bear the full risk of further placing the bond with investors and, if necessary, take the unplaced amounts into their own books. This gives the issuer the guarantee of the placement from the syndicate. Meanwhile, however, a pure placement syndicate is widespread, in which the banks involved only endeavor to place the desired amount with investors ( English Best Effort Base ). The issuer then only receives the placed amount. In the case of insufficient interest on the part of investors in an issue, in the worst case scenario it can be canceled or withdrawn, which can then lead to considerable reputational damage for the issuer. Depending on the type of assumption of the risk of selling the bond, the banking consortium receives a bank fee from the issuer.
  • Self-issuance: With self-issuance, the issuer issues the bond itself without the help of banks (rather uncommon in Germany). The advantages of a self-issue are, in addition to the elimination of the fee, the independence from credit institutions and the flexibility in structuring the framework conditions for a bond issue.

A distinction is also made between private and public placement of corporate bonds. In the case of public placement ( IPO ), corporate bonds are introduced and traded on the stock exchange, where they can be bought or sold at current prices. In the case of a private placement , the bond is offered to a limited group of investors and, as a rule, they are held until maturity. There is no regulated trading in these titles. A resale during the term is only possible if the owner of the bond tries to find a buyer himself.

Corporate bonds according to the size of the issuer

Corporate bonds

Industrial bonds are issued by industrial groups . Such bonds are generally characterized by a long term and high issue volumes. In addition to industry , issuers can also be large trading companies or transport companies . The rating is mainly carried out by the internationally operating rating agencies such as B. Standard & Poor's , Moody's or Fitch .

Mittelstand bonds

Mittelstand bonds are issued by medium-sized companies or family businesses that want to expand their financing structure to the capital market. The issue volume is usually smaller than that of industrial bonds. It ranges in size between 15 and 150 million euros. The average maturity is 5 years, which is also below the average maturity of industrial bonds (10 to 15 years).

Corporate bonds issued by medium-sized companies often contain a fixed interest coupon with a premium of up to 6 percentage points compared to large corporate bonds with the same term. Since medium- sized corporate bonds , in addition to institutional investors , are primarily addressed to private investors, individual partial amounts can be purchased by investors. Partial bonds with a nominal value of EUR 1,000 or more are usually offered.

In contrast to the large industrial bonds, medium-sized corporate bonds are more likely to be rated by national rating agencies such as Creditreform , Euler Hermes or Scope.

Due to the lower issue volumes, trading on the stock exchange with SME bonds is less pronounced than with industrial bonds. Experts speak of an increased liquidity risk , as it is more difficult to find a buyer for a medium-sized bond. Due to the increased risk, the yields on medium-sized bonds are generally higher than those of industrial bonds. In addition, holders of medium-sized bonds tend to want to keep their paper for the long term.

Market development

Markets

  • National bond market: National corporate bonds are issued by domestic companies. The bond can be placed on the market as part of a self-issue or a third-party issue. The corporate bond is issued in the local currency, taking into account the regulations of the country of domicile.
  • International bond market: International corporate bonds are issued by issuers from all over the world. The European Union , the USA , Japan , India and China are among the most relevant and largest markets for corporate bonds . The issuers come primarily from the automotive , construction , financial services , energy supply , telecommunications , tobacco and food sectors . In the case of international corporate bonds ( foreign currency bonds ), currency risk is an additional source of risk.

Growing relevance of corporate bonds

Increased default risks generally led to stricter lending guidelines ( minimum capital requirements for credit risks under Basel III ), so that it has become more difficult for companies to obtain loans from credit institutions . It can be observed that banks only grant loans with (increased) collateral or with increased credit margins . The introduction of Basel III as a result of the financial crisis in 2007 further exacerbated this development. The refinancing of banks has become more expensive, and risks are assessed tend to be higher than before. As a result, bank customers are increasingly differentiating themselves according to their creditworthiness, which means that loans are granted less quickly. It is therefore to be expected that the costs, especially for long-term loans, will increase, so that companies will increasingly finance themselves on the capital market in the future .

Studies show the growing importance of corporate bonds. While corporate bonds from issuers domiciled in Germany worth around 83.9 billion euros in circulation in 2005, the value in 2015 was around 257.6 billion euros. So an increase of over 200% can be observed. In April 2016, there were bonds from German companies with a value of around EUR 266.3 billion in circulation.

On the flip side, increased investor demand for corporate bonds is also an indication that the corporate bond market will continue to grow. In times of low interest rates , investors look for alternative forms of investment. The returns on government bonds or traditional banking products are at a very low level, so that more and more investors are deviating from them. Institutional investors, who are exposed to considerable investment restrictions due to regulatory provisions, are now also taking corporate bonds into their portfolios as an essential investment alternative. The company's share in its bond portfolio rose from 14.8% to 23.1% between 2011 and 2015.

Valuation of corporate bonds

The value of a corporate bond, expressed in terms of the stock exchange price , is subject to various influencing factors. Price fluctuations depend on the general market interest rate , the remaining term, the coupon payments and the creditworthiness of the issuer. The demand for newly issued bonds then tends to rise, as investors want / can benefit from higher nominal interest rates. This can also be easily explained mathematically, since the market value of a corporate bond is the sum of the future discounted payments. The payments are discounted using the capital market interest rate. Conversely, the higher the fixed coupon interest, the higher the market value.

The remaining term to maturity is also an important factor, as the price of a corporate bond converges to its nominal value the closer the bond gets to the date of repayment. The issuer's creditworthiness also leads to changes in market values. Rumors about payment difficulties or actual defaults cause the prices of the respective issuer's securities to fall sharply.

Bond types

species

  • Standard bonds are bonds with a fixed interest rate on the nominal value and a fixed term .
  • Zero coupon bonds ( zero bonds ) are bonds that do not contain any fixed coupon payments. The investor receives a return that is simply the difference between the issue price and the redemption price. For this reason, zero-coupon bonds are usually at a deep discount ( discount issued) and repaid at maturity at 100%.
  • Redemption bonds (and draw bonds ) are bonds with a fixed coupon payment, whereby the bond is not repaid in full at the end of the term, but over a certain period of time. The issuer usually first sets a grace period, after which a regular drawing is made to determine which creditor gets his money back. This is an extremely rare form of corporate bond.
  • Annuity bonds are papers in which the investorgetshis capital repaid in equal installmentsuntil maturity . The installments consist of the coupon and part of the repayment.
  • Lottery bonds (or premium bonds ) are bonds, in which instead of or in addition to a coupon rate a premium from a lottery are paid.
  • Perpetuals (perpetuities, consol bonds) are a special form of corporate bonds in which the issuer never has to repay the money. The return for investors is only derived from the coupon payments, which, however, are usually higher than with standard bonds. They are uncommon for corporate bonds and only occur with government bonds.
  • Floating rate notes (floaters, bonds with a variable nominal interest rate) are papers in which the nominal interest rate is adjusted during the term. This should protect the investor from changes in interest rates. The amount of interest is linked to a reference interest rate such as B. the LIBOR ( London Interbank Offered Rate ) or the EURIBOR ( European Interbank Offered Rate ) or the yields for short-term bonds ( e.g. Treasury bills , T-bills ). Floaters are often also equipped with lower interest limits ( floor floaters ) or upper interest limits ( cap floaters ).
  • Step-up interest bonds are papers in which the coupon increases with the remaining term ( English step-up bond ) or decreases ( English step-down bond ), with the direction of interest being determined at the time of issue.
  • Bonds with step-up coupons are bonds in which the coupon is adjusted when the rating changes. If the bond's rating is downgraded, the interest rate rises; conversely, if the bond is upgraded, the interest rate falls.
  • Inflation-linked bonds ( English inflation-linked bonds ) offer investors protection against inflation risk. The nominal value is adjusted accordingly to inflation within a certain period of time, mostly using the consumer price index as a reference.

Options

  • Convertible bonds (convertible bonds, english Convertible Bonds ) are securities in which the investor has the right at maturity to convert the nominal value of the bond in a predetermined number of shares.
  • Bonds with warrants usually have a term of between 10 and 12 years. When the bond with warrants is issued, in addition to the interest and repayment modalities, the conditions for the subscription of shares are also specified -i.e.the subscription ratio , the subscription price and the subscription period. A certain number of shares can then be acquired at the subscription price within the subscription period. Exercising the option is independent of the bond. Because of the additional option right, the nominal interest rate on the option bond is comparatively low. For companies, bonds with warrants are an inexpensive form of financing, as the attached warrant can lower the interest payments compared to a normal bond. If the option is exercised, the settlement in shares does not affect the company's liquidity. For investors, this financial derivative combines the properties of a bond with those of the share. If the share price rises, a higher return can be achievedwith the warrant due to the leverage effect . In the event of falling share prices, the warrant becomes worthless in extreme cases, but the interest payments and repayments of the bond remain unchanged. In contrast to a convertible bond, the bearer bond of a bond with warrants remains in place until the end of the term, even if the option is exercised. The convertible bond, on the other hand, ends as soon as the respective investor has made use of his conversion right. Even if the option right of a bond with warrants is not exercised, it is possible to sell it separately from the bond, as the option right is usually listed separately on the stock exchange.
  • Convertibles ( English equity bonds ) are papers, in which the issuer at maturity has the right to convert the nominal value of the bond in a predetermined number of shares. Risk premiums are usually included in the coupon rates for such bonds.
  • Callable bonds are bonds where the issuer has the right to repay the money in full before the end of the term. The debtor will make use of this right when interest rates have fallen and he can raise capital on the capital market on more favorable terms.
  • Putable bonds are papers in which the investor has the right to demand full repayment from the issuer before the end of the term. The investor will make use of his right if the issuer's creditworthiness has deteriorated or capital market rates have risen, making it possible to invest in bonds with higher interest rates.

Collateral

  • Backed bond ( english covered bond ): The issuing company secured the loan through its own assets and can thus reduce the risk of the investor, which is in a lower coupon rate expressed.
  • Unsecured bond ( English unsecured bond ): The issuing company is liable for the obligations of the bond with its profitability . In the event of insolvency , the company is liquidated, so that there is a risk of total investment failure for investors.

Business aspects

The 1950s and early 1960s of industrial growth were the heyday of industrial bonds in Germany. In 1960 listed German stock markets over 260 different industrial bonds. The promissory note loan increasingly replaced the industrial bond in the mid-1960s. The German Investment Code (KAGB), which has been in force since July 2013, requires issuing companies to publish a sales prospectus that must contain certain minimum information ( Section 165 KAGB).

The number and market volume of corporate bonds more than doubled between 1990 and 2004 in the euro area, which is also due to their (risk-related) higher yields . In the financial crisis from 2007 onwards , industrial bonds lost their importance again because this financial crisis also led to corporate crises for large companies.

For the issuing company, bonds are more favorable for tax purposes than shares , since the interest expense as business expenses reduces the taxable profit , while dividends as the appropriation of profit are fully taxable. However, corporate bonds are subject to a permanent debt of the business tax . A major disadvantage is that the company has to pay the interest expense even in times of loss , while dividends can be reduced or eliminated entirely. The claims of creditors to interest and principal payments are, however, to be satisfied before the claims of shareholders or other owners.

The higher risk of corporate bonds compared to government bonds, which can be classified as risk-free, is expressed in a high credit spread , which reflects the higher remuneration demands of investors for the different risks of corporate bonds. Because of the higher interest rate level, industrial bonds have a lower duration than risk-free government bonds.

In June 2013, there were 500 listed bonds of German non-bank - corporations of 236 issuers, of which 136 SMEs. Their market volume was 228 billion euros (including large companies 221.7 billion euros).

Accounting

The issuing company has taken corporate bonds to § 266 para. 3 C no. 1 HGB among the liabilities separately as "bonds" passivate . Corporations are also obliged under Section 285 No. 1a of the German Commercial Code (HGB) to list bonds with a remaining term of more than five years in the notes .

In June 2016, began ECB of its purchase program in the context (of government bonds , covered bonds and asset-backed asset-backed securities ) with the purchase of corporate bonds ( English corporate sector purchase programs ). The ECB or the selected six central banks thereafter be purchased in euro-denominated bonds issued by companies in the euro zone , which has a facility worthy credit rating ( English investment grade feature). The central banks buy in both the primary and secondary markets . The bonds must have a term of at least six months and up to 30 years from purchase. The central banks can purchase up to 70% of a single issue on behalf of the Eurosystem .

Risks

With corporate bonds, there are four main risks for investors , which can also occur cumulatively.

  • Credit risk : It occurs when the obligor interest payment or repayment can not provide all or part of. This creditor risk is lower for covered bonds that are secured by assets of the bond debtor , but not completely eliminated. Corporate bonds are mostly uncovered bonds.
  • Interest rate risk : This risk arises for the investor if the current interest rate level exceeds the return (also approximately: the nominal interest rate ) during the term of the bond.
  • Exchange rate risk : This arises for investors who believe that the bond currency (here usually the euro) is a foreign currency if the exchange rate falls below the original acquisition rate during the term of the bond.
  • Inflation risk: This risk occurs if inflation turns out to be higher than expected during the term of the bond. It's the uncertainty about the real size of future payouts. It is to be assessed separately from the interest rate risk, because the Fisher effect can only be empirically proven in the long term. This risk is eliminated with inflation-indexed bonds .

These risks lead to the classification of a bond in a certain risk class.

Switzerland

In Switzerland, the Swiss Code of Obligations (OR) does not differentiate between bonds and obligations, but instead speaks uniformly of bonds in Articles 1156 to 1186 OR when it comes to the legal description . Most of these articles deal with the community of bondholders , which pro forma already exists with the issue of a bond, but only becomes important in practice in the event of bankruptcy . Since z. B. commercial banks, insurance companies and any other company can issue bonds, the term industrial bond only exists as a sub-category. Bonds issued by the Swiss government are called federal bonds , all bonds are called federal bonds .

See also

Individual evidence

  1. ^ Deutsche Börse, Corporate Bonds ( Memento from February 15, 2017 in the Internet Archive )
  2. ^ André Jacob: Corporate Banking. 1996, p. 48.
  3. ^ Erich Achterberg: The Frankfurt am Main banking center. 1955, p. 55 f.
  4. ↑ Christoph A. Kern: Typicity as a structural principle of private law. 2013, p. 369.
  5. ^ Kay Giesecke, Francis A. Longstaff, Stephen Schaefer, Ilya Strebulaev: Corporate bond default risk. In: Journal of Financial Economics. 2011, p. 235.
  6. ^ Wolfgang Breuer, Thilo Schweizer, Claudia Breuer: Gabler Lexikon Corporate Finance. 2003, p. 491.
  7. ^ Wolfgang Breuer, Thilo Schweizer, Claudia Breuer: Gabler Lexikon Corporate Finance. 2003, p. 106.
  8. ↑ a b Bondguide - SME bonds Bondguide - The portal for corporate bonds. Retrieved July 21, 2016.
  9. ↑ a b erstegroup - corporate bonds Erstegroup. Retrieved July 21, 2016.
  10. ↑ Statista. The Statistics Portal - Corporate Bonds Circulation in Germany Retrieved on July 21, 2016.
  11. ^ Deutsche Bundesbank, Bundesbank study on German corporate bonds. Accessed July 21, 2016.
  12. ↑ The Investment - Institutional Investors Count on Corporate Bonds. Accessed July 21, 2016.
  13. ↑ Detlef Bierbaum, Klaus Feinen (Ed.): Bank- und Finanzwirtschaft 1997, p. 421.
  14. ^ Astrid van Landschoot: Determinants of Euro Term Structure of Credit Spreads. In: ECB Working Paper Series 397, October 2004, p. 5.
  15. ^ Sönke Strauss: Determinants of Credit Spreads for German Corporate Bonds. 2009, p. 1.
  16. ^ Karlheinz Gnad: The duration in interest rate risk management. 1996, p. 15.
  17. ↑ Creditreform, 2013, pp. 11–15.