Startups are always in need of capital to fuel growth and innovation. While traditional funding avenues like Venture Capital, Private Equity and Bank loans are popular choices, another attractive option is a bond issuance program.
Bonds offer start-ups an opportunity to tap into the debt market and raise funds from a diverse pool of investors. However, navigating the complexities of a bond issuance program requires the involvement of various parties.
It can be a long arduous process getting the necessary parties to an agreement table and then working them through your requirements, particularly without an expert to guide you through what each party is more concerned about when it comes to their involvement in your program.
Firstly, in this article, we will explore the parties essential to a successful bong issuance program and then look at other essentials to a successful raise in other articles.
‘The Issuer’ – Start-up Company
At the heart of a bond issuance program is the company itself looking to raise funding. Known as the issuer of the bonds, this plays a pivotal role in determining the terms, condition(s), structure, duration and purpose of the bond program.
The company must first have a compelling business plan and or pitch deck to woo potential investors, and even its proposed other parties to work with it. Next, the ‘Issuer’ must have strong growth prospects, be working in a growing or inflation-defensive sector of the economy and have a clear, and undiluted, strategy for utilizing the funds raised through the program.
A trustee acts as an independent third party to protect the interests of bondholders. They oversee the bond issuance process, monitor its explicit compliance with the bond’s terms and conditions set out in its Offer Memorandum, and ensure that the start-up fulfils its obligations to bondholders down to the letter.
The trustee also plays a crucial role in facilitating communication between the Issuer and the investors throughout the lifetime of the bond. Some bonds can last as much as 10 years in certain cases.
An investment bank acts as the intermediary between the start-up company and potential investors. They play a critical role in structuring the bond’s offering(s) per the Issuer’s requirements, determining the appropriate bond type and offer style, and then pricing the bonds.
The investment bank also assists with the legal and regulatory compliance aspects of the issuance of the laws of the land. Their expertise and network within the financial industry are invaluable as they can help attract potential investors and maximize some part, or all parts of the start-up’s funding potential in a bid to ensure its obligation(s) to bondholders are more than covered.
To ensure compliance with applicable securities laws and regulatory bodies, the involvement of legal counsel is crucial. Experienced securities lawyers help the start-up navigate the complex legal framework surrounding bond issuances, drafting the necessary legal documents, and ensuring compliance with Offer Memorandum disclosure requirements.
They also assist the ‘Issuer’ negotiate fair terms and conditions of the offering to protect the interests of both its ‘principal, the ‘Issuer’, and the investors.
Underwriters play a vital role in guaranteeing the sale of the bonds. They purchase the bonds from the start-up at a discounted price and then resell them to investors at a higher price, earning a profit on the spread.
Underwriters are therefore there to assume the risk of the bond issuance and use their wealth of expertise and extensive network to market the bonds effectively. They help you the ‘Issuer’ assess the market’s appetite for the bonds and determine an optimal pricing strategy to ensure a successful program.
Little can happen without the Rating Agency getting involved in your bond issuance. They evaluate the creditworthiness of the start-up, its business, and its ability to pay back its debts, both the issued bond and other, otherwise, taken debt instruments and then assign a rating to the currently proposed bond.
This rating provides investors with an independent assessment of the risk associated with investing in the company’s vision through its bond program. A higher rating indicates a lower risk of default and can lead to much lower borrowing costs for the start-up.
Conversely, the higher risk outlook typically leads to higher borrowing costs for the ‘Issuer’, especially if, or when, one or some of the already stated parties are not part of your program. Thus, the involvement of reputable rating agencies adds credibility to your bond issuance and attracts a broader range of investors than had you gone it yourself.
In addition to investment banks, start-ups often engage the services of financial, or Business, Advisors with knowledge of the processes and parties typically involved in issuance programs to guide them through one, especially when it’s their first time out.
Business Advisors typically provide strategic advice on the initial organizational and business structure of the company, and its proposed issuance offering. They also help ‘Issuers’ time the market, optimizing the terms of the bond issuance program and ensuring all parties are not only on board with the program but are living up to the tenets of their signed agreement to the ‘Issuer’.
More critically, Business Advisors guide the start-up, or ‘Issuer’ to a point in their growth cycle where they look more attractive to all parties that need to be involved with the company and help the company, its board, or business owners, make informed decisions to greatly enhance their chances of success in raising funds through the bond market.
In fact, if thinking of raising a bond, it is advisable to approach and engage the services of a Business Advisor first as they typically know which companies and parties would be particularly interested in working with ‘issuers’ from a particular economic sector.
A Bond Depository
Last but not least is a Depository. A bond depository plays a crucial role in a bond issuance program by providing a centralized platform for the safekeeping, transfer, and settlement of bond securities. Unlike the trustees, the Depository serves as a custodian and intermediary between issuers, investors, and other market participants. Their main objective is;
1. Safekeeping of Bonds by holding the physical or electronic evidence of ownership thus eliminating the risk of loss, theft, or damage to the bonds, providing a secure environment for investors.
2. Efficient Transfer of Bond Ownership, simplifying the process of buying, selling, and transferring the bonds.
3. Clearing and Settlement: When a bond trade occurs, the depository ensures that the buyer receives the bonds and the seller receives the payment.
4. Record-Keeping and Reporting: This record-keeping function enables accurate and transparent reporting, which is essential for regulatory compliance, auditing purposes, and investor transparency.
5. Corporate Actions and Services: Bond issuers often undertake various corporate actions during the life of the bond, such as interest payments, coupon redemptions, bond calls, and maturities. The bond depository plays a vital role in coordinating and administering these corporate actions, ensuring timely and accurate distribution of payments or other entitlements to bondholders.
6. Market Integrity and Confidence: By providing a centralized and regulated infrastructure for bond issuance and trading, a bond depository enhances market integrity and investor confidence. It establishes standardized procedures, safeguards against fraud, and ensures compliance with regulatory requirements. The presence of a reputable depository can attract a much broader range of investors to your issue program than had you gone it alone.
In conclusion, raising funds through a bond issuance program can be an attractive option for start-ups looking to fuel quick growth and expansion. However, the process involves multiple parties working in harmony to ensure a successful outcome. From the start-up company – the ‘Issuer’, the investment bank, to legal counsels, underwriters, rating agencies, trustees, and business advisors, each party plays a critical role in different aspects of the program. By assembling the right team of experts, especially if done through an experienced Business Advisor, a start-up can greatly enhance its prospects of securing funding and embark on a path of sustainable business growth.
Brain Essien is a financial analyst and business process consultant, with expertise in business plan formulation and pitch deck design, brand management, digital marketing, crowd/private equity and seed fund brokerage.