Low interest rates are a momentum for companies / issuers to get working capital and expansion capital by borrowing money from banks or issuing bonds. For those of you who work in the Corporate Finance or Corporate Finance Division, it is always a separate debate whether funding must be achieved by borrowing money from banks or borrowing money from the public through bonds. Because you borrow money, then what’s the difference?
For those of you who are still lay, basically, generally the advantage of borrowing money from a bank is a loan condition that is more flexible and can be adjusted to the needs. Suppose you have a 2-year project with an estimated requirement of IDR 100 M in the first year and IDR 100 M in the second year. By negotiating at the Bank, we can get a loan commitment of Rp 200 M, with a distribution of Rp 100 M in the first year and Rp 100 M in the second year, of course with the calculation of interest in accordance with the funds distributed. The risks borne are changes in interest rates. If during the payment period the interest rate rises, the loan interest may be increased and vice versa.
While the advantages of bonds are at fixed interest rates. Suppose you issue a bond with a coupon of 10% and a maturity of 5 years, for 5 years if there is an increase or decrease in interest, the amount of the coupon you have to pay is fixed. This will provide certainty, but the disadvantage is that if your project has needs like the example above, you still have to issue bonds worth Rp 200 billion at the first time and pay interest based on the total even though you only used half of it next year.
The above causes each option to have its own advantages and disadvantages so that there are still many devotees. However, since the end of 2010, the advantages of bonds have increased along with the issuance of the BAPEPAM-LK IX.A.15 regulation on Sustainable Public Offering. From these regulations, the last 2 years, the world of bonds began to be enlivened with a new variant known as Sustainable bail bonds. what is this bond like?
Sustainable bail bonds is one of the new variations of Bonds, where BAPEPAM-LK or now OJK gives companies the freedom to issue bonds within 2 years, with enough to only ask for an effective statement once. For example, with the case example above, the company that chooses the option to issue bonds can do so by issuing bonds twice with each IDR 100 M in a period of 2 years with only one effective statement.
Effective statement is the process needed to make a securities allowed to be offered to the general public. Including mutual funds, before being offered to investors must also ask for an effective statement. As industry players in the capital market, the process of submitting effective statements is not difficult, but it is also not easy and requires time. So the planning must be done carefully.
For the capital market industry, where sentiment can change rapidly, sometimes the time of management can be a separate obstacle. For example, the time the instrument is still in the plan of being issued, market conditions are still good, but at the time the statement was obtained it turned out that the situation that had been conducive turned into a crisis, consequently the results of product offerings to the community could not meet the expected targets.
If you read further, some requirements that must be met by the issuer include:
- Request an effective statement at the time of first publication.
- Minimum Investment Grade bond rating (mentioned 4 top ranks, from AAA, AA, A and BBB)
- Establish loan ceiling from the beginning and be fulfilled within 2 years of receiving an effective statement.
- Report to the OJK regarding the fund collection plan and results
Because of these very flexible conditions, I see that in the past 2 years there have been a lot of issuers that have begun to switch to issuing these Sustainable bail bonds. Even companies that have not issued bonds, some have begun to switch to using sustainable bond options. This is certainly good for the economy and capital market in general because it adds to the supply of bonds on the market.
Based on data from the Indonesia Stock Exchange, Sustainable bail bonds that currently exist include:
Sustainable Corporate Bonds in Indonesia.
At present, the number of Sustainable bail bonds compared to total corporate bonds is 37%, I believe with flexible conditions, in the future, most bonds will be more dominated by Sustainable bail bonds than conventional bonds. For issuers that are already accustomed to issuing bonds, this option is a choice that greatly saves administrative and promotional costs due to the issuance of bonds, besides coupons, there are also many other costs (administration, audit, legal) and effort (procedural due diligence, preparation of financial reports, etc. ) which must be issued and carried out.
However, Sustainable bail bonds still have a big disadvantage compared to bank loan options, especially for companies that still do not often issue bonds. And this is the certainty of getting funds as needed. If you borrow from a bank and are approved, then we will definitely receive the amount of funds according to your needs. However, if through bond options, there is still a possibility that the amount of funds collected can be more or less than the number of needs. The reason for the success in selling bonds, depends very much on the company’s ability and underwritting the “selling prospects” of the company to investors. In addition, those who were convinced were not only 1 like bank loans, but the number of investors could be tens or hundreds.
Thus this article, hopefully can provide benefits for you.
The mention of investment products (if any) does not mean to give a good bad rating, or a recommendation to buy or hold for certain instruments. The purpose of giving an example is to show facts that reinforce the opinion of the writer. Past Performance is not a guarantee that it will repeat itself in the future. All posts, comments and responses to comments are personal opinions.