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First and foremost, this article is a practical guide. In it, you will find everything you need to know if you are considering issuing bonds – from the initial plan through the terms and conditions of the issue and the bond prospectus to distribution to investors. And second, it is proof that bonds can be an excellent tool in the hands of those who approach them responsibly.
“Bonds are like high-octane fuel. If you have a healthy business – an engine that runs well – they will get you to your destination more flexibly and faster than a bank,” says bond expert Michal Kapitán with a smile.
Michal Kapitán has prepared an interview for you on how a bond issue works from the inside. If you prefer listening to reading, play it.
A bond issue is the process in which a company issues bonds and offers them to investors. Investors provide the company with capital in exchange for interest on that capital (most often in the form of regular yield payments) and a commitment to repay the capital provided (the principal) when the bond matures.
Interest may be paid in a single payment at the bond’s maturity together with the principal or, in the case of so-called zero-coupon bonds, the interest is represented by the difference between the price at which the issuer sells the bond and the nominal value (principal) it repays at the end. For example, it sells a bond for CZK 90,000 and is obliged to repay CZK 100,000 in three years.
In practice, it is an alternative to a bank loan. With bonds, the issuer sets the financing terms itself – the interest rate, maturity, and use of proceeds. At the same time, however, the terms must be set so that the market accepts them and investors want to put their money in – while the whole arrangement still remains advantageous for the issuer.
“Finding that sweet spot is sometimes quite a balancing act, which is also why we work with analysts and advisors on bond issues who complement our legal work with experience from the market environment,” adds attorney Vít Kučera.
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Corporate bonds can be issued by anyone – from a small limited liability company (s.r.o.) to a large joint-stock company (a.s.). Typically, the companies that come to us need CZK 20 million or more, have 10 to 500 employees, and a healthy business model.
Companies that need capital for a project but do not want to be tied to a bank’s repayment schedule. Bonds give them room to build in peace and to repay only once they sell the finished property.
Companies that are growing and need money for expansion, warehouse space, or the modernization of production. The bank won’t lend to them, or ties them down with overly strict conditions.
We do not recommend bond issues to new companies and start-ups. Investors want to see a story – how the company has grown, where it is heading, what it has been through. A new company does not have that, and investors may not want to put money into such a project.
“Bonds are about the story a company tells through its numbers. A new company often doesn’t work for investors,” says attorney Michal Kapitán.
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For most business owners, a bank is their first instinct when they need to borrow money. It is quite logical. Bonds seem complicated, unfamiliar, perhaps even risky. And a bank is a constant, a certainty people know. Yet in many situations, the exact opposite is true.
| Bank loan | Bond issue | |
|---|---|---|
| Approval | Strict conditions and clearly defined limits. | You set the terms yourself – as long as the market accepts them. |
| Information about the company | The bank investigates you and your company in great detail. | A significantly smaller scope. For issues with a prospectus, you submit the last 2 financial statements. |
| Repayment | Principal repayments often from the first month. | You only pay interest. You repay the principal at the end. |
| Oversight | The bank monitors every step throughout. | Investors are mainly interested in the interest and the smooth progress of the project. |
| Flexibility | The bank’s standardized terms. | Tailor-made – interest rate, maturity, purpose, collateral. |
| Speed | Weeks to months, depending on the bank. | An issue without a prospectus from 1 month. |
| Costs | Lower interest, but covenants and hidden costs. | Higher interest, but more freedom and fewer restrictions. |
“If you go to a bank, the bank is a very strict boss. If you don’t fit into its boxes, it won’t lend to you. Bond investors are quieter, reliable partners,” says attorney Jiří Mlčák.
A developer wants to build a residential project. The bank will lend to him, but wants repayments right away. The developer does not have the money – he will have it in two years, once he sells the apartments. So instead of going to the bank, he issues bonds with a three-year term.
Why? Because bonds can be structured so that the developer does not have to pay anything at all until maturity. He issues bonds, raises capital, and can focus on construction, sells the completed project, and pays off the bonds from the money earned. These are so-called zero-coupon bonds.
One of the first decisions when issuing bonds is choosing the issue regime.
If the volume of the bond issue does not exceed EUR 5 million (~CZK 120 million) over 12 months, you do not need a prospectus. An issue without a prospectus is faster, cheaper, and is not subject to proceedings before the Czech National Bank (ČNB).
“Just don’t forget that you still need high-quality terms and conditions of the issue,” adds attorney Michal Kapitán.
Every bond has what are called terms and conditions of the issue. They are the fundamental document of the entire issue – a kind of recipe book that defines the life of the bond from beginning to end.
Who is issuing the bonds and on what terms, what the interest rate is, how often it is paid (quarterly, semi-annually, annually), whether the bond can be redeemed early, what the covenants are (obligations of the bond issuer beyond the obligation to pay interest and repay the principal, e.g., not to exceed a certain level of indebtedness), and what risks the issue entails.
A larger issue requires a bond prospectus approved by the Czech National Bank. It contains detailed information about the issuer, financial data, specific projects, and a description of the risks.
Jiří Mlčák, an attorney specializing in bond financing and proceedings before the ČNB, says: “The prospectus is the most important source of information for an investor. That is why we place extraordinary emphasis on its preparation.”
The bond issue process from our practice:
1. A personal meeting – you go through the plan, the volume, and the purpose with an attorney. At endors, we can usually assess at the very first meeting whether bonds make sense – or whether another route is better (a fund, a loan, a bank loan).
2. Analysis and setup – a proposed structure for the issue follows. The attorney works with an economic advisor or analyst who helps set the parameters so that they make business sense and, at the same time, the market accepts your issue.
3. Preparation of documentation – the attorney drafts the terms and conditions of the issue (the simplest are 15 pages long) or, where applicable, a complete bond prospectus (up to 150 pages). Other documents also need to be addressed – pledge agreements, guarantee declarations, corporate resolutions.
4. Distribution – at endors, we work with reputable securities dealers and can offer your issue to them.
5. Administration and support – promotion follows (which has clear rules), including administration throughout the life of the issue.
An issue without a prospectus is usually completed in one to two months (depending, of course, on several factors such as the issuer’s readiness, its level of cooperation, how clear its idea of the issue parameters is, etc.). An issue with a prospectus takes 4–6 months, including the ČNB approval procedure.
It depends on the volume, the regime, the collateral, and the distribution. An issue without a prospectus is significantly cheaper.
Schedule a no-obligation meeting. We will prepare a tailor-made cost estimate for you.
You can offer the bonds yourself, but a securities dealer has a reputation, a ČNB license, and a portfolio of investors. If they offer your issue to their investors, it multiplies your chances of success. That is also why we at endors work with dealers, so that we can arrange this for you as well.
Write to Michal Kapitán at info@endors.cz. At the first meeting, we will assess together whether a bond issue is the right path – or whether there is a better option.
Michal and his team at endors have completed more than 150 issues with a total volume exceeding CZK 10 billion. They work with developers, financial groups, and companies dealing with financing for the first time.
Partner at endors, responsible for quality in capital markets. 150+ bond issues with a volume of over CZK 10 billion.
Attorney at endors, specialist in bond financing, loans, and proceedings before the ČNB.
Founder and managing partner of endors. Creator of the firm’s vision and guardian of its values.
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