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    4 Replies Latest reply on Jul 26, 2011 4:33 PM by pdsnicks

    Corporate Bonds.

    Financial Holding Corporation Wayfarer

      Corporate Bonds Corporation. Hello All, I just finished setting up a fund management company that I have been slowly but surely been properly starting up. Yet, I am now at a paradox or opportunity based on how you are seeing it. The only type of funds I am looking to manage and access are corporate [junk] bonds. For their ease on paper work and legalities involving all parties. Only mid-market & boutique investment banks are the banks are the only game in town. For any one seeking $10M or more. Nothing out there for the little businesses. Which brings me to the scenario on this posting, If there was a fund managing firm that could setup corporate bond issuance and fund management for your small business would you seek their services. As of today the government only allows for corporate banks and corporate finance firms to dabble into corporate bonds. Both for their risk and heavy regulation on board members and issuing entities. Yet the legal paper work and contracts involved cost no more than $750 and depending on the firm, it should cost 1-2% for issuance and management; yet in the SEC sections a maximum of 5,000 can be charged if only processing the corporate issuance, which in definition can be the initiation or sell of a bond. With not much getting jabbering details... I am now looking at only the management of small business corporate bonds. A market completely neglected and overshadowed. Yet its not as easy as it sounds, there needs to be a willing buyer and seller for the bonds. Yet, imagine if you already have a company with some profit and steady growing little by little. If you spot a growth opportunity or buyout interest an IOU corporate bond could be used, you get funding based on your companies assets and cash flow just like the big guys do, and you still have to pay interest or dividends and at the maturity of the bond you are given the option to re-issue or payout the bond. In 5 years your company could be broke or bigger it is the risk of corporate bonds. Yet like the larger banks the risk of default are based on the liquidation of your cash-able assets.  Extremely favorable for the lenders or bond buyers. -The state where I am incorporated is quite lax on financial transactions yet because of the proximity to NYC still very detailed, yet I have encountered green lights at the town, county and as of today state level in regards to regulation and process. I could also scratch all I have mentioned and just hit every mid-market bank in NYC and if that fails try the boutique investment banks. Yet, I truly think that I could venture out on my own and focus on the small business industry. If a small ice cream place could get 20,000 to buy new refrigerators or remodel and repay it back in 5 years I see it as good business sense. On the other hand few bond holders would not mind getting 1-2% monthly on the bond and if it defaults before the 5 years liquidate the assets for at least 5,000 at 1 year before full maturity the bond its covered. Even if I don’t get any responses or feedback from this forum, I am sure I will be able to move on and grow my management company. Yet feed back will be appreciated.

        • Corporate Bonds.
          phanio Pioneer

          If you are seeking bond funding for your business - you might also think about tax exempt bonds.  You can go to your city's local development department and inquire.  The benefit here is that your local government can help you structure and sell these bonds.  Plus, for the investor (those who buy them) they are tax exempt - meaning they do not pay taxes on the returns (coupon - appreciation) they receive.  Makes them more liquid and in higher demand.

            • Corporate Bonds.
              Financial Holding Corporation Wayfarer

              Hello Phanio,

              Thanks for the reply, in order to qualify for local tax exempt bonds the project itself need to be approved and requested by the city council and governing county. Limiting to only infrastructure / educational and civil service projects. If an entrepreneur is looking to purchase an existing bar or business the town will not be able to issue tax exempt bonds or even status for it is considered a private sector matter.

              - My interest are only aimed at the private sector.  I do thank you for the input though.

            • Corporate Bonds.
              ArcSine Scout

              That's an interesting concept, FHC. I did have a couple questions, though...

               

              The terms of a typical coupon bond make such an issue analogous to an interest-only, bullet maturity type of loan. With no principal amortization over the life of the loan, it's critical that the issuer's asset base and earnings stream not suffer any erosion---otherwise, the loan-to-value cushion might become too thin, or even go upside down.

               

              The typical large, diverse bond issuer usually has a broad, relatively low-risk asset base, and a history of predictable earnings. These characteristics might not be true of a small business. In such case, how do you see the ongoing monitoring of the issuer's condition being handled? For example, will audited financials be required, and will that suffice?

               

              Second, can the transaction costs (including the pre-issue due diligence) be kept low enough on a small bond issue to keep it cost-effective?

               

              Again, you've got an intriguing concept, and I'd like to hear more. Thanks!

              • Re: Corporate Bonds.
                pdsnicks Newbie

                Since the number of people I have found locally who understand this concept is limited, I decided to search business community forums.  What I've found is:

                 

                you are the only one who has said verbatim what I've been saying to JP Morgan and others.

                 

                Based on the date of this post, you may have already partnered with exclusive investment banks willing to underwrite these types of high-yield, non-investment grade bonds.  If you have a solid process in place, our company has been working on an issuance as well and would love your help.  If not, I would love to talk about ideas in what I've found and learned along with what you have going.

                 

                Thanks so much FHC.  Follow my profile and then send a PM or email to discuss this further.