The Lusaka Securities Exchange with the approval of the capital markets regulator, the Securities Exchange Commission announced the floating of a 5 year corporate bond worth K300,000 by Bayport Financial Services Zambia. Allow me if you can, to breakdown the fancy finance phraseology and intricacies of a corporate bond, that is usually associated with MBA speak. What exactly is corporate bond? When a company wants to expand operations or fund new business ventures, they often turn to the operate bond market to borrow money from investors.
Companies use the proceeds from bond sales for a wide variety of purposes, including buying new equipment, investing in research and development, buying back their own stock, paying shareholder dividends, refinancing debt, and financing mergers and acquisitions. A company determines how much it would like to borrow and then issues a bond in that amount. Investors that buy that bond are effectively lending money to the company according to the terms established in the bond offering.
To understand bonds, it is helpful to compare them with stocks. When you buy a share of common stock, you own equity in the company and will receive any dividends declared and paid by the company. When you buy a corporate bond, you do not own equity in the company. You will receive only the interest and principal on the bond, no matter how profitable the company becomes or how high its stock price climbs. However, if the company runs into financial difficulties, it still has a legal obligation to make timely payments of interest and principal. The company has no similar obligation to pay dividends to shareholders. In a bankruptcy, bond investors have priority (in the pecking order) over shareholders in claims on the company’s assets.
Over the years, the corporate bond market has attracted many investors seeking higher yields than those offered by government bonds. In general, corporates are the second largest in the bond market after government bonds.
Unlike equities, ownership of corporate bonds does not signify an ownership interest in the company that has issued a bond. Instead, the company, in this case Bayport Financial pays the investor a rate of taxable interest over a period of time and repays the principal at the maturity date established at the time of the bond’s issue.
While some corporate bonds have redemption or call features that can affect the maturity date, most are loosely categorised into the following maturity or redemption dates:
- Maturities can be short term (less than three years),
- Medium term (four to 10 years), or long term (more than 10 years), and
- Longer-term bonds usually offer higher interest rates, but may entail additional risks.
Bonds and the companies that issue them are also classified according to their credit quality. Credit rating agencies assign credit ratings based on their evaluation of the risk that the company may default on its bonds. Credit rating agencies periodically review their bond ratings and may revise them if conditions or expectations change. Based on their credit ratings, bonds can be either investment grade or non-investment grade. Investment-grade bonds are considered more likely than non-investment grade bonds to be paid on time. Non-investment grade bonds, which are also called high-yield or speculative bonds, generally offer higher interest rates to compensate investors for greater risk.
At this point we are allowed to use the overused Latin phrase, ‘caveat emptor’ – let the buyer beware. It will be assumed the credit reference bureau would have graded the first tranche of the 300,000 million ZMK to ascertain the investment grade of the Bayport bond. Suffice to say, Bayport has been down this road before. In 2014, it floated a medium term corporate bond for 150 million ZMK. However, due to the strength of investor confidence the value of the transaction increased by 21 million ZMK. Not only did the issue break a long dry spell for the market, it was the largest corporate bond issuance in Zambian history. Outstanding!
There’s no doubt that Bayport has been on a positive trajectory in earnings and EBIT. In its second quarter (Q2, 2017) earnings report it showed that earnings had grown by 11% from 49.4 million ZMK to 55.47 million ZMK .
By all measurements, Bayport is a leading deposit taking non-banking institution after Izwe loans that is returning positive shareholder value. Bayport Financial Services Limited was first incorporated in 2002 and it is regulated by the Bank of Zambia. They boast of presence in Botswana, Colombia, Ghana, Tanzania, CFC and Uganda.
Conversely, Bayport’s successful bond issuance needs to be viewed in context. The firm possesses a strong business model and a sound loan portfolio. In addition, its cofounders are experienced executives with a wealth of domestic experience and relationships in banking, government, and information technology. This make them a formidable management team that is creating value in Zambia.