Discover forms of bond issuance most popular today. The article analyzes in depth the factors affecting the release.
Bonds and the Importance of Issuance
Before going into forms of bond issuance, we need to understand the nature of bonds. Basically, bonds are a type of debt security, confirming the obligation to repay (both principal and interest) of the issuing organization (debtor) to the bond owner (creditor) within a specified period of time.
Issuing bonds brings many benefits:
- For issuing organizations (Government, enterprises):
- Effectively mobilize medium and long-term capital to finance investment projects, expand production and business, or balance the budget.
- Diversify capital sources, reduce dependence on bank credit.
- The cost of capital can be more competitive than bank loans (depending on creditworthiness and market conditions).
- Enhance image and reputation in the financial market.
- For investors:
- An investment channel that generates relatively stable fixed income from interest rates.
- Diversify your portfolio, reduce risk.
- It is possible to benefit from price differences if trading on the secondary market.
Because of these important roles, the process and forms of bond issuance are tightly regulated and attract great interest from the market.
What is the Bond Issue Price? The Decisive Factors
An important concept to grasp when learning about bond issuance is the issue price. So, What is the bond issue price??
Bond issue price is the price that an investor must pay to buy a bond for the first time in the primary market (issuance market). This price can be equal to, higher (issued at a premium) or lower (issued at a discount) than the face value of the bond. Types of bonds.
- Issue at par value: Issue price = Par value. This usually occurs when the bond's nominal interest rate is equal to the market's required interest rate on bonds of the same risk and maturity.
- Issue with extra: Issue price > Par value. Occurs when the nominal interest rate of the bond is higher than the market interest rate. Investors are willing to pay more than the par value to receive a more attractive interest rate.
- Discounted issue: Issue price < Face value. Occurs when the nominal interest rate of the bond is lower than the market interest rate. The issuer must sell below face value to attract investors.
Main factors affecting What is the bond issue price??
- Bond face value: The nominal value stated on the bond.
- Nominal interest rate (Coupon rate): The fixed or floating interest rate that the issuer promises to pay to the bondholder.
- Market interest rate: The prevailing market interest rate for debt instruments of similar risk and maturity at the time of issue. This is a key factor in determining whether the issue price is above or below par value.
- Bond term: Time remaining until bond maturity.
- Credit rating of the issuing organization: Highly reputable institutions often issue bonds at lower interest rates and better prices.
- Supply and demand of bonds in the market: Market factors also affect prices.
Clearly understand What is the bond issue price? and influencing factors help investors make reasonable purchase decisions and issuers determine appropriate offering prices.
Popular Bond Issuance Methods
There are many bond issuance method different, depending on the capital mobilization target, the target investor and legal regulations. Basically, it can be classified into the following main methods:
1. Bond issuance auction (Auction)
This is a public competition method, often applied to the issuance of government bonds or bonds of large, reputable enterprises. The issuing organization (or authorized unit) will announce the issuance and investors (usually financial institutions, banks, insurance companies) will place a purchase price (or bid interest rate).
There are two main forms of bidding:
- Competitive interest rate bidding: Investors propose the interest rate they are willing to buy. The issuing organization will select the winning interest rates from low to high until the required volume is mobilized. The final winning interest rate can be applied as a whole (Dutch auction) or each investor wins according to the interest rate they set (American auction).
- Non-competitive interest rate bidding: Investors only register the purchase volume and accept the general winning interest rate of the competitive interest auction. This form is usually for small investors.
The advantages of bidding are transparency, fairness and can help the issuing organization achieve the best mobilization interest rate according to market conditions.
2. Bond underwriting
In bond issuance method In this case, the issuing organization will sign a contract with one or a group of underwriters (usually securities companies or investment banks). The underwriter commits to buying all or part of the issued bonds for resale to the public, or commits to buying the remaining amount if not fully distributed.
Common forms of guarantees:
- Guarantee with firm commitment: The underwriter commits to purchase the entire bond lot at the agreed price and bears all risks if it is not sold out. This is the safest form for the issuer.
- Best Efforts Guarantee: The underwriter acts as an agent, committing to do its best to sell the bonds but is not responsible for buying back the unsold portion. The risk lies with the issuing organization.
- All or None (AON) Guarantee: The issue is only successful if all the bonds are sold. Otherwise, the issue will be canceled.
- Minimum – Maximum Guarantee (Mini-Maxi): Set a minimum and maximum threshold for the number of bonds that can be sold. The issue only takes place if the minimum threshold is met.
Underwriting helps ensure the success of a capital raising, leveraging the distribution network and expertise of the underwriter. However, underwriting costs can be quite high.
3. Issuing Agent
The issuer authorizes a financial institution (agent) to distribute the bonds to investors. The agent does not bear the risk of distribution and only receives a service fee based on the volume sold. Bond issuance method This is similar to a best efforts guarantee.
4. Direct Sale
The issuer itself organizes the distribution of bonds directly to investors without going through an intermediary or agent. This method saves on intermediary costs but requires the issuer to have sufficient capacity, experience and network to approach investors. It is often applied to small-scale or individual issuances.
The choice bond issuance method Which depends on the size of the issue, the reputation of the issuer, the target investor base, and acceptable costs.
Forms of Corporate Bond Issuance
Enterprises can raise capital through bonds in many different forms, complying with the provisions of the Securities Law, the Enterprise Law and related guiding documents. Forms of corporate bond issuance Mainly include:
1. Public Offering
This is a form of offering bonds to all investors, with no limit on quantity. The process of issuing to the public is often complicated, requiring businesses to meet strict conditions on financial status, corporate governance, transparent information disclosure and must be licensed by the State Securities Commission (SSC).
- Condition: Enterprises must have fully contributed charter capital according to regulations, profitable business operations in the previous year (or no accumulated losses), have a feasible issuance plan and capital usage plan, have audited financial statements approved, etc.
- Advantage: Mobilizing large capital sources from many investors, improving liquidity for bonds, enhancing corporate reputation.
- Disadvantages: The procedure is complicated, time consuming and costly, and requires strict information disclosure.
2. Private Placement
This is a form of offering bonds to a limited number of investors (less than 100 investors, excluding professional securities investors) and does not use mass media.
- Object: Usually strategic investors, professional securities investors (banks, financial companies, securities companies, investment funds, individuals with practice certificates or holding large investment portfolios, etc.).
- Condition: The issuance procedure is simpler than a public offering, but still requires compliance with regulations on documents, information disclosure to participating investors and reporting to management agencies. Enterprises also need to meet certain conditions regarding financial status and capital usage plan.
- Advantage: Quick and flexible procedures, lower costs, better preservation of business secrets.
- Disadvantages: The number of investors is limited, the ability to raise capital may not be as large as public issuance, the liquidity of bonds is often lower due to trading restrictions (usually 1 year from the date of completion of the issuance).
Choosing between public and private offerings is one of the most important decisions to consider when considering an investment. Forms of corporate bond issuanceBusinesses need to carefully consider capital needs, ability to meet legal requirements, costs and long-term goals.
Monitor Market News Regular updates will help businesses and investors stay updated on the latest regulations and bond issuance trends.
Forms of Government Bond Issuance
Government bonds are an important capital mobilization tool for the state budget, used to offset budget deficits, invest in infrastructure development and implement socio-economic goals. Forms of government bond issuance Mainly include:
1. Bidding through the Stock Exchange (SGDCK)
This is the most common form in Vietnam. The State Treasury (a unit authorized by the Ministry of Finance) organizes regular or ad hoc government bond auctions at the Stock Exchange (mainly the HNX). Bidding members (mainly commercial banks and securities companies) will participate in bidding (competitive or non-competitive interest rates).
- Procedure: Invitation to bid -> Submit bid -> Determine bid results -> Announce results -> Pay for bond purchase.
- Advantage: Transparent, public, interest rates determined according to the market, attracting large institutional investors.
2. Issuance guarantee
In some cases, the Government (through the Ministry of Finance or its authorized agency) may choose to underwrite the issuance, especially when issuing government bonds to the international market or special issuances. The underwriter (usually a large international investment bank) will commit to purchasing and redistributing the bonds.
3. Retail through the State Treasury system
In addition to the above forms, government bonds can also be sold directly to individuals and organizations through the State Treasury system. This form aims to diversify investors and mobilize idle capital from the population. However, the scale is often not as large as bidding.
Forms of government bond issuance designed to ensure effective capital mobilization for the budget, while contributing to the development of the bond market, creating a reference interest rate for the financial market.
Relationship with Other Forms of Securities Issuance
Bonds are just one type of security. Bond issuance has many similarities and differences compared to forms of securities issuance other, mainly stocks.
- Alike:
- Both are forms of capital mobilization in the financial market.
- Can be issued publicly or privately.
- All must comply with legal regulations on securities and the securities market (issuance conditions, documents, information disclosure...).
- Methods such as guarantees and issuing agents can be used.
- Different:
- Nature: Issuing bonds is raising borrowed capital (increasing debt), issuing shares is raising equity capital (increasing charter capital).
- Investor benefits: Bondholders are creditors, have priority in principal and interest payments, and have no voting rights. Shareholders are owners, receive dividends (if any), have voting rights, and have limited liability.
- Risk: Bonds are generally lower risk than stocks (especially government bonds), but the potential returns are also usually lower.
- Conditions of release: The conditions for issuing shares to the public are often more stringent than those for bonds (e.g., requirements for continuous profits over many years).
Understanding this difference helps issuers choose the right capital raising tool and investors build a balanced portfolio. Forms of securities issuance In general, they are important capital channels for the economy.
Notes When Participating in the Bond Issuance Market
Whether you are an issuer or an investor, participating in the bond issuance market requires caution and understanding.
- For issuers:
- Detailed planning: Clearly define the purpose of capital use, capital structure, and debt repayment capacity.
- Credit rating: Improve financial capacity and information transparency to improve creditworthiness.
- Choose the appropriate form and method: Consider the advantages and disadvantages of each type (public/private) and method (bidding/guarantee/…) to optimize costs and mobilization efficiency.
- Compliance with the law: Carefully study and fully comply with regulations on information release and disclosure.
- Cash flow management: Ensure the ability to pay principal and interest on time.
- For investors:
- Find out more information: Carefully read the prospectus, the document disclosing information about the issuer, the purpose of capital use, collateral (if any), and the terms and conditions of the bond.
- Risk Assessment: Analyze the creditworthiness of the issuer, interest rate risk, liquidity risk. Don't just look at high interest rates and ignore risks.
- Diversification: Don't "put all your eggs in one basket", allocate investments to different types of bonds (government, reputable businesses) or combine with other investment channels.
- Understand rights and obligations: Understand the terms of interest rate, term, call option, conversion option (if any).
- Distinguish between public and private issuance: Private placement bonds are generally higher risk and trading restrictions. Only professional investors or investors with a high risk tolerance should participate.
Conclude
Forms of bond issuance very diverse, from public to private issuance, from bidding to underwriting, applicable to both government bonds and corporate bonds. Each form and method has its own characteristics, processes and legal requirements. To update the latest analysis and information on the financial market, don't forget to follow articles and reports from reputable sources such as HVA.
Understanding forms of bond issuance, bond issuance method, What is the bond issue price?, as well as the difference between Forms of corporate bond issuance and forms of government bond issuance, and the relationship with forms of securities issuance It not only helps the issuer choose the optimal capital mobilization strategy but also equips investors with the basic knowledge to make smarter, safer and more effective investment decisions.
