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Corporate bonds

October 18, 2011

A lack of trust and liquidity in the crisis-hit banking sector has seen more and more companies look beyond regular bank loans and switch to alternative means of financing, such as corporate bonds.

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Deutsche Bank logo and tall building
Banks are not the only places companies can get financingImage: picture alliance/dpa

Reiff is a Baden-Württemburg company that specalizes in the production of wheels and tires. In order to take over a competitor, the family business placed corporate bonds worth 30 million euros.

The bond issue gave Reiff the money it needed in exchange for a promise of returns of more than 7 percent over a period of five years.

Company boss Eberhard Reiff told Deutsche Welle the system is quite different from taking out a regular bank loan because "the purchaser has no influence over the running of the business."

Borrowing from a bank requires all kinds of guarantees and securities, not to mention an acceptance on the part of the borrower that once they take what the bank is offering, they are dependent upon its economic situation.

Loan not a given

Not everyone who applies for a loan nowadays is granted one. As Dirk Elberskirch, chairman of the Dusseldorf Stock Exchange explained, banks were extremely reluctant to extend loans or grant new ones during the last financial crisis. That pattern has spurred many companies to seek alternatives.

"A lot of businesses were very disappointed by their banks and are now looking for more independent financing," Elberskirch told Deutsche Welle.

A graph line going upwards. In front of it, a silhouette of a man
Corporate bonds are becoming increasingly popular on German stock exchangesImage: Bilderbox

And that is not hard to find. Indeed the market has become so attractive that in May 2010 the Stuttgart Stock Exchange opened a segment dedicated to bonds issued by medium-sized businesses. Other stock markets followed suit. Corporate bonds worth some 170 million euros were placed on the Dusseldorf exchange between April and July.

For Elberskirch, the size of the company plays an important role. He says corporate bonds are only interesting for businesses with an annual turnover of at least 50 million euros.

Ratings necessary

In order to tap into the capital market, the company has to receive a rating from specialist agent such as Euler Hermes.

"We begin our assessment of the company by trying to understand its business model," managing director Ralf Garrn told Deutsche Welle, adding that Euler Hermes analysts then look at risks the company is taking and whether it has a capital buffer.

His colleagues spend two days at the company they are assessing, and a total of one month on the evaluation. A rating is valid for a year, after which time the process has to be repeated. It is an essential expense.

"These days companies are looking at one-off costs worth between 3 and 5 percent of the value of the loan," Elberskirch said.

Money on a scale
For many investors, the prospect of a higher profit is worth the increased riskImage: Picture-alliance/dpa

High profit, high risk

On top of that, they have to pay annual interest, which is no small undertaking. The standard rate of interest, which is currently between 7 and 8 percent, is attractive for private investors, who offer medium-sized companies loans in denominations of 1,000 euros.

But Tobias Gressinger, a lawyer for the Dusseldorf-based law firm, CMS, warns investors to be aware of the risks.

"The high rate of interest promised reflects the nature of the risks involved," he told Deutsche Welle, adding that corporate bonds are not savings accounts. "The higher the levels of interest, the higher the risk of loss."

Author: Zhang Danhong / tkw
Editor: Sam Edmonds