Why fund-raising via bonds is better than bank debt

What you need to know:

Green bonds are increasingly becoming popular and have been issued by China and India.
Stock exchanges globally, such as the London and Johannesburg, have guidelines on the issuance of green bonds.
Many investors are keen to invest in environmental projects such as in green energy and climatic change.
Social bonds are also becoming common where governments raise capital for social projects such as housing and hospitals.

Bonds are a form of investment that can be issued by companies, governments and even counties to raise capital for projects. The Kenyan government has announced plans to issue a green bond to raise capital for projects on the environment.

Green bonds are increasingly becoming popular and have been issued by China and India.

Stock exchanges globally, such as the London and Johannesburg, have guidelines on the issuance of green bonds.

Many investors are keen to invest in environmental projects such as in green energy and climatic change.

Social bonds are also becoming common where governments raise capital for social projects such as housing and hospitals.

A bond is a fixed income investment in which investors loan money to an entity such as a government, which borrows the funds for a specified period of time and at a given interest rate.

Bondholders are known as issuers. Bonds are payable periodically and are issued to many different investors.

A bond can be traded over the counter, through private arrangement, or it can be listed. A listed bond is subject to regulations of the Capital Markets Authority and Nairobi Securities Exchange, amongst others. Bonds can be traded, meaning that even after buying the initial issue an investor can sell the same in the market. Since a bond operates like a debt it is repayable on the terms and conditions set out during issue.

Risks in bonds are rated just like in any other investment. Bonds which are rated as low risk usually attract a lot of investors globally.

Bonds are reputed as a more attractive form of debt finance than traditional bank loans for several reasons. First, a bond doesn’t restrict the issuer as much as the bank loan.

Assuming that the issuer is a company, when the firm takes a loan from a bank it has to register a debenture as well as subject itself to a lot of restriction clauses such as not changing shareholding without authority.

A bond doesn’t have these kind of restrictive covenants and therefore gives a company or individual more leeway to operate. A bond would enable the company to attract many investors at one go. This means there is a wider pool from which the company can access investment rather than rely on one or few investors. A bond doesn’t dilute a company’s shares like equity investment does.

For an investor, a bond is attractive as the returns are predictable and repayments are done periodically.

It is a fixed income investment, meaning returns are offered in a predictable manner.

However, bonds can also be risky on the part of the investor. But this risk can be mitigated depending on the type of bond one invests in.

A listed bond subjects an issuer to a lot of compliance procedures by the regulator.

A municipal bond is issued by municipal governments for purposes of carrying out their projects. In Kenya a county government can issue a municipal bond to enable it raise capital for certain projects.

Nairobi County had announced plans to issue a municipal bond. Issuance of such bonds involves a lot of regulations and regulators.

One being the Constitution and laws on county finance. The financial regulators also have a role to play if a county government issued a municipal bond.

County governments ought to consider municipal bonds as a source of capital.