Corporate Bonds = A Fake Friend?

Corporate Bonds = A Fake Friend?

5/15/2022

The offer of a corporate bond, whose prospectus is approved by the Czech National Bank... Sounds good, right? It's almost as if the CNB guarantees the company's quality... but nothing could be further from the truth.


... on one hand, they seem like safe and clear investments, but on the other hand, they are associated with many risks.  

Evidence can be found in corporate bonds worth over 4 billion from companies like Pietro Fillipi, KARA, Growing Way, or the collapse of the Arca holding. After these companies went bankrupt, their clients were left with a very costly experience. 

But let's break it down:

When a company needs to finance its operations/project and lacks cash flow, it can either: 

a) borrow from a bank, or 

b) issue corporate bonds. 

—> A corporate bond is nothing more than a loan that obliges the company to pay the creditor (investor) the debt + a set interest. If the bank's terms are too strict (the bank considers the project/company risky), the company often goes the route of corporate bonds. 


Ah, the bank didn't consider the company solvent, or the risk was evaluated with high interest/fees/guarantees? Should I buy a bond from such a company?  

The bank may evaluate the project as small, new, and risky, and may not lend to the company at all, or lend under strict conditions. So, why not borrow from people?

NO!

Questions you should consider:

The same patterns appear in the offers → very well-written emails, offices at a nice address, incredible returns almost immediately, prospectus approved by the CNB, etc.

What's the reality? 

→ With a simple Google search of the company, you'll find it's usually about a year old, and rarely will you find information about its turnover or value. 

→ High returns are associated with high risk! For corporate bonds of small companies or projects, there's a risk of complete loss of invested funds.

What about the CNB? 

According to §15 of the Investment Companies and Funds Act, practically anyone can create a fund for managing foreign assets. It's registered in the CNB database, but the CNB does not further control its activities or guarantee for the company! 

  1. The CNB approves the bond prospectus, but only formally! 
  2. It does not evaluate the quality of the entity. 
  3. It does not assess financial results. 
  4. It does not evaluate credit risk. 
  5. It does not guarantee future profitability or the ability to repay returns.

→ At the moment the company goes bankrupt, not only will you not receive the agreed interest, but you won't even get the principal amount back.

HOW TO PROTECT YOURSELF? 

I recommend focusing on diversification and when it comes to bonds, invest in a large number of GLOBAL corporations with a traceable history, which also have international ratings.  

A bond does not automatically mean safety.

Feel free to contact us for any further questions!

Do not hesitate to contact us

Contact

Ing. Petra Štěpánková, MBA, EFA

+420 604 218 602

petra@meliorinvest.cz

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