Laurynas Staniulis. The price of risk appetite
Recently, the market has seen a number of bond offers that have surprised the market with the level of returns offered. Investors have been offered bonds with yields as high as 12% or more. Integre Trans UAB, one of the fastest growing transport and logistics companies, was no exception.
In spring 2023, Integre Trans launched a €4,000,000 bond issue with an impressive interest rate of 12% + 6-month EURIBOR, to be redeemed in May 2026. However, already on 6 May 2024, the company announced its planned restructuring.
Very recently, the market received news that Integre Trans UAB's restructuring efforts were not successful and on 17 July 2024 the Vilnius Regional Court opened bankruptcy proceedings against Integre Trans UAB. Subsequently, the Court of Appeal of Lithuania annulled the decision and referred the matter for reconsideration.
What lies ahead for bondholders.
It should be recalled that the bonds issued by UAB Integre Trans were not secured by pledges or other collateral. This means that, in the event of the company's bankruptcy, the bondholders are simply the company's creditors without any privileges.
In the event of insolvency, the bondholders would be included in the creditors' queue on a general basis and their claims would be jointly satisfied with other creditors, but only after the claims of the mortgage holders, the employees and the claims of the State Tax Inspectorate (VMI) and the Social Insurance Institution (Sodros) had been satisfied.
Thus, the 70% discount on UAB Integre Trans bonds is available today, which clearly reflects investor sentiment.
Of course, it is difficult to predict at this stage how the restructuring case will turn out and, if it does, whether it will be possible to restructure the business and avoid insolvency, but two things can already be said today:
- The bonds will not be redeemed on the due date.
- Investors will not get the promised 12% + 6 month EURIBOR return.
UAB Integre Trans bonds are currently available at a 70% discount.
So, once again, a bond is simply a debt security issued by a company or government. It is a document that gives the holder of the bond the right to apply to the entity that issued the bond at the end of the bond period. The entity that issued the bond is obliged to repay the money invested. In other words, the bondholder and the issuing entity are linked by an elementary loan relationship.
Sometimes it seems that underwriting bonds is a way of avoiding the requirements for informed investors by making it possible for people to invest - to buy bonds - who are not prepared to properly assess the risks involved. This is particularly the case when bonds are issued by collective investment undertakings for informed investors, commonly known as funds.
I have already mentioned that in recent years we have seen a trend towards very high yields and relatively short maturities. In the market, bonds with yields as low as 15% may, in fact, mean that, for one reason or another, traditional financing methods, such as loans from financial institutions or investment funds, are not available.
It is important to note that bonds offered on the market are usually not secured by mortgaged real estate, but rather by a pledge of the shares of the company that issued the bond as collateral. In terms of whether such collateral provides real protection, the answer is probably not.
If shares are pledged, it is likely that the issuer does not have any assets to pledge or that those assets are already pledged. This means that if the worst case scenario does occur and the entity is unable to redeem the bonds, the claims of the bondholders would only be satisfied after the claims of the mortgage lender have been satisfied and only if there is any money left would the claims of the bondholders be satisfied. I would therefore probably not be very far wrong in saying that such bonds are, in essence, simply a loan without any additional security for the bondholder.
It should also be noted that bonds can be placed to refinance an existing bond issue, while the source of redemption for a new bond is a future bond issue. This pattern of short-term high-yield bonds implies that the bonds are not issued to finance new activities that would directly result in a source of redemption, but rather to temporarily balance cash flows, build equity or the like.
The natural question is whether the issuer will be able to refinance the bonds at maturity and service even more expensive bonds if necessary. Probably not, which leads to the view that the bonds issued simply reflect the issuers' belief in a positive market development. But the question "what if..." remains unanswered.
Sometimes the answer to this question can be deduced, albeit indirectly, from the assessment of the issuer. If the issuer is a project company that is part of a large group of companies and the bonds are not guaranteed by the "parent" company, we may consider that the "parent" company is aware of the risks of the project and is not prepared to fulfil its obligations to the bondholders at any cost. Of course, these are only assumptions and one would like to believe that, in the event of the issuer's inability to meet its obligations, there would be a consolidation of the Group's forces to redeem the bonds. However, the reluctance to commit formally leaves the question open.
Bonds are not a new way of raising funds and are certainly not a threat in themselves. Bonds, like any other investment, involve risks that each investor has to assess individually according to his or her risk appetite. However, in any case, investing in bonds should not only involve a careful assessment of the issuer or the collateral, but also an understanding of the objectives of the bond issue. Better still, you should outsource the assessment of these risks to experts in the field - investment funds.
What can we learn?
Perhaps the main idea is that the rate of return is proportional to the investment risk.
Bonds are a complex investment product that is not designed for "household" investors.