Bonds are a promising source of funding for both private companies and institutions

Bonds are a type of debt security used to raise funds in the financial market. In a simplified manner, the nature of the transaction can be described as borrowing by the bond issuer on the market from many lenders (bond buyers) according to the same conditions contained in the bond issue regulations or prospectus prepared by the issuer.

While the situation and demand in the financial market at the time of bond issuance, as well as the recommendations of consultants, are of decisive importance, the issuer, when developing the bond offer documents, has a significant opportunity to influence the "rules of the game," including the amount to issue bonds, the term, the coupon (interest) rate, offering a secured or unsecured transaction, and defining the purpose of using the funds broadly or narrowly. Thus, bond issuance can serve as an excellent opportunity to attract financing if the company is seeking alternatives to banks and privately offered financing.

Although the issuance of bonds is a promising source of funding, very few companies in the Baltics utilize it. The most frequently heard concerns are related to the complexity of the issuing process, the cost, and doubts about the interest of potential investors.

Preliminaries and issuance of bonds

It is true that before issuing listed bonds, the company must ensure that the preparatory work has been completed or will be completed in the foreseeable future and allocate the necessary resources for this. Requirements in the markets and exchanges of different countries may differ, but a clear identification of preliminary work is not problematic. For example, the Nasdaq website provides information on the requirements of the First North market (suitable for smaller and newer companies) and the regulated market (suitable for larger companies with a long history of operation). First North's market requirements include annual and semi-annual financial statements, a simplified company description, and signing a contract with a certified consultant. On the other hand, the requirements of the regulated market include the preparation of IFRS standard annual and interim reports and a prospectus, a report on corporate governance and sustainability, as well as set requirements for a certain duration of the company's operation and a minimum emission threshold (0.2 MEUR).

In the process of developing the initial company description or prospectus, one should consider preparing detailed information about the company, its history, corporate governance, business, financial indicators, and be able to identify and describe the risks related to the issuer, the industry, and the specific bonds. Organizing the company and preparing the necessary documents takes both time and financial resources; usually, it cannot be done in a day or a week. But with the help of a professional team of consultants, the process can proceed smoothly and take a few months. It should be noted that a company can issue bonds several times.

Accordingly, the initially invested work, for example, arranging the company's corporate governance, describing its operation and related risks, remains a strong "base," and the investment pays off in the long term, as it can be built upon in the future. As long as the bonds are publicly traded, the company must also be prepared to regularly publish its financial results and disclose information about all significant events that may affect the company and the price of the bonds, but the preparation of this information does not require huge resources on a daily basis.

The company does not always have to bear the financial burden of all the expenses related to the issue itself. For example, until now, companies have periodically been able to apply for financial support granted by the Central Finance and Contracts Agency, based on funding from European Union funds. The amount of co-financing can reach up to 50% of the total preparation costs for launching a successful bond issue on the stock exchange. A part of the consultant's costs is also often based on the "success fee" principle, that is, payable only in the case of a successful bond issue.

Investor interest in bonds

Whether investors might have sufficient interest in buying the bonds intended to be issued can be ascertained by initiating preparatory work and consulting with specialists, such as an investment bank. Sometimes, investor interest may even exceed supply. For instance, at the end of 2022, AS CleanR Group issued bonds amounting to 15 million euros with the support of the investment bank Signet Bank. The demand for CleanR Grupa bonds exceeded the offer by one and a half times, demonstrating strong interest from Latvian investors. Therefore, it is incorrect to assume that the Baltic financial market is uninteresting for investors. If there is an idea of raising significant funds and a vision of how to use them, it is always worth trying and consulting, ensuring that the specific company gains a clear understanding of whether a bond issue could be the way to go.

Funding can be attracted on the stock exchange when there is interest from investors, but the company must be willing to receive it and be prepared to invest resources in conducting preparatory work. This process can be active yet fairly clear and smooth under the guidance of experienced consultants. Issuing bonds can empower a company to fulfill its dreams, expand, conquer new markets, and pursue more ambitious plans.

The stock exchange, consultants, and industry experts must also assist companies, primarily by discussing their opportunities, explaining complexities in simplified language, and providing encouragement. Encouragement, support, and even broader explanatory campaigns could help companies understand that issuing bonds on the stock exchange is not merely a distant and unattainable dream but something that is genuinely real and possible. It is also necessary to educate the public about investment types, opportunities, advantages, and areas where there is still room for growth.