Short(er) term Bonds. Why do they exist and what are the benefits for investors?
Short-termed bonds are less common, so we thought that we should talk about them a little more in depth both from the issuer's and investor's perspectives.
One of our upcoming bond issues will be relatively short-termed: 6 months. Short-termed bonds are less common, so we thought that we should talk about them a little more in depth both from the issuer's and investor's perspectives.
Bridge financing
Shorter term financing (less than 12 months) is usually used to ‘bridge’ additional financing before a senior lender comes into the project with relatively cheaper type of financing, yet usually with more stringent conditions. It could be that a project needs to meet certain conditions, for example certain pre-lease level requirements for commercial real estate projects, or simply because sometimes senior lenders’ due diligence process takes longer than desired, the construction process is well underway and the shareholders want to utilize external financing rather than to continue funding the project through additional capital contributions.
The most recent example of successful bridge financing in the Baltic market is a bond issue of € 42,7 M that was raised by Evernord financial broker to refinance the existing development bonds for a commercial real estate project located in Riga, Marijas str. 2, where the developer and the fund manager that own the project borrowed additional capital for 12 months, to bridge the financing before onboarding the senior lender for the project. 62% of the previous bondholders participated in this issue.
Bonds vs. time deposits (liet. terminuotieji indėliai)
Time wise there may be different investment strategies. For example, you may have a spare amount of money that you want to invest and you don't think you will need this money for the foreseeable future. In this case you may be looking for a fixed term investment opportunity with a term as long as possible, at least a couple of years, maybe even 5. It will allow you to get some passive income, and not to worry about the money or any procedures in the meantime (in the scenario where everything goes well).
On the other hand, your investment goals may be entirely different. For example, even though you now have some spare money, you know that you will need it for something specific (let's say a trip around the world) in 8 months. It would still be nice for the money to ‘earn money’ (in our scenario you could travel more), but you can't invest in bonds with maturity of 2-3 years or similar. In that case a likely scenario is for you to keep a time deposit of 6 months in a bank, especially with the current interest rates. Say you have saved € 30 K for your world trip, the highest annual interest rate you can now get is 3,8%, so at the end of term you will receive € 570.
An alternative could be investing in short-term bonds. Let's say these are 6-months bonds with annual interest rate of 9%. Given that you made a good investment decision, at the end of term you will get € 1 350, which will take you to more amazing places around the world. Hence, although investing in bonds is relatively more risky than making a bank deposit, this option also earns you more money in the same short amount of time. And then you can go on your world tour or make another investment.
