An alternative to bank financing: high-yield bonds
Traditionally, the Spanish business sector has funded its growth essentially through bank financing. However, the current credit crunch (as a result not only of the downturn, but also of the growing restrictions on the capital of credit institutions themselves) have led them to seek out alternative or supplementary sources of funding. Among those alternatives, most notably, is the placement of bonds or debentures among investors and, especially in the last few years, the securities known as high-yield bonds.
These bonds have a speculative risk rating, because they are below what is known as “investment grade,” and thus offer higher yields due to the theoretically greater risk of default.
The factors which determine the greater risks of high-yield bonds include: (i) the issuer’s debt level; (ii) additional financing needs due to expansion or acquisition; (iii) sector of activity, with greater risk or competition; or (iv) unfamiliarity with the issuer on the markets.
Potential investors typically have a highly professional profile, such as mutual funds, insurance companies, asset managers, alternative management funds and, in general, professional investors who, in exchange for a higher level of risk, look for a greater return.
One should not make the mistake of equating the greater risk of these bonds necessarily with situations of financial distress as high-yield bond issuers include large enterprises that are household names, such as ONO, Codere, Campofrío, Cirsa, Abengoa, or OHL, to mention but a few, in the case of Spain.
High-yield bond issues are usually characterized as a form of bullet financing (on maturity, at 5, 7 or up to ten years) and, although they are also subject to a series of restrictions or covenants, they offer greater flexibility to issuers in their ordinary management than the restrictions and covenants normally existing in bank financing. The bonds issued are usually secured by collateral and personal guarantees from the issuer’s subsidiaries.
In Spain, the recent amendment of the Securities Market Law has removed the ceiling on bond issues by unlisted companies, provided that the placement is targeted (as in the case of high-yield issues) at (i) qualified investors, (ii) investors subscribing a minimum of €100,000, or (iii) where the denomination per unit of the securities is at least €100,000, enabling the issue to be structured without the company having to set up a subsidiary or SPV in another European jurisdiction, thereby reducing the costs of the issue.