Why are we securing our bonds?
The existence of a hedge or its absence affects the investment risk and thus the interest rate on the bonds. Unsecured securities will usually be the source of higher interest from those secured.
Large economic entities that have a good financial standing and strong reputation do not generally secure the debt they issue, as the risk of their insolvency is negligible. On the other hand, entities whose reliability is less certain often secure their debt securities in order to increase their attractiveness and to provide investors with protection against possible losses in the event of insolvency.
What are the most commonly used types of bond securities?
A mortgage is usually the most appreciated type of collateral because it largely meets the expectations of both the issuer and the investor, and the very method of establishing collateral is relatively simple and cheap. However, the mortgage has its drawbacks, among which, from the perspective of the issuer, first of all, the limited freedom to dispose of the property on which the mortgage was established. In addition, in the case of smaller, beginner companies, they are often not in possession of a properly valuable asset, which does not allow them to use this form of security. On the other hand, from an investor’s perspective, collateral in the form of a mortgage does not always equate to easy enforcement of its receivables – especially when the object of collateral is a property that is not easy to sell.
A registered pledge is an equally frequent form used to secure claims. When the pledge is established, the creditor acquires the right, by virtue of which he will be able to claim satisfaction from the encumbered property, regardless of who became the property. Its subject may be movable things, eg motor vehicles or equipment, but most often the pledge is established on assets such as shares, investment certificates or collections of claims, from which the possible execution would take place faster and more effectively. Establishment of a registered pledge requires the conclusion of a pledge agreement between the owner of the subject of the collateral and the administrator of the pledge and entry into the pledge register. Importantly, bondholders have priority over other personal creditors of the debtor, and the registered pledge itself does not expire despite limitation of the claim secured by it (this does not apply to interest). Issuers are willing to use this method of security, due to the simplicity and low costs of its establishment.
Another method of securing the issuance of bonds are sureties granted by banks or other financial institutions or other entities brought to life for this purpose. The surety can be compared to some kind of guarantee provided by the guarantor for the issuer and to the bondholders. Most often, the role of the issuer is the special purpose vehicle, and the guarantor is its parent company, i.e. the parent entity or another entity related to the issuer.
Considering such a variant of collateral in the first place from the investor’s perspective – it seems the key financial condition of the guarantor and its ability to repay liabilities (financial standing). The reason is simple – if a large financial institution, such as a bank, grants a surety to the issuer, it significantly increases its credibility. From the perspective of the issuer, the situation is quite different. The financial institution will not provide a surety if it does not verify the issuer’s credibility. Which means that the company will have to undergo time-consuming verification of its financial situation, which will involve the involvement of employees. In addition, in the case of guarantees, issuers must take into account additional costs in the form of fees for preparation to grant a surety, as well as the institution’s remuneration for granting a surety.
For the effective establishment of financial collateral it is required to conclude an agreement specifying two elements: claims that are secured and the way they are secured. Such an agreement is usually concluded between the investment firm and the owner of financial instruments, which may be the issuer. The security method itself can function in three ways, i.e. rely on the transfer (also subject to repurchase) of the right to cash or financial instruments or the establishment of a financial pledge or financial blockage on them. The process of establishing financial security is simplified by the fact that the contract concluded for this purpose does not require a certain date or signatures certified by a notary. The establishment of collateral is recorded in the account or records kept by the investment firm (i.e. brokerage house) for the establishing collateral. In the event of a basis for the performance of the collateral, the bondholders for whom it was established will be satisfied by selling the collateral, offsetting or offsetting its value against the receivables from the bonds or through its acquisition. However, attention should be paid to the fact that financial security does not protect bondholders, for example if the bailiff takes the subject of security in connection with the execution he conducts for other material creditors.
Notarial declaration of submission to enforcement
The issuer’s execution title pursuant to art. 777 §1 point 5) and 6) of the Code of Civil Procedure, it is not strictly a security for debt instruments. It is a statement in the form of a notarial deed, in which the issuer (or material debtor) is subject to execution for a specified amount listed directly in the notarial deed. In addition, the notarial deed specifies the cases and events on which the execution of such an execution depends and the date by which the creditor (most often the security agent on the account of the bondholders) may apply for giving this act an enforcement clause. This form of additional “reinforcement” of collateral is particularly interesting for both parties and is therefore very often used on the market. From the investor’s perspective, the declaration of submission to enforcement by the issuer significantly facilitates the recovery – in the case of non-repayment of bonds, the court procedure is simplified to a minimum. On the basis of the notarial act itself, the court gives the enforcement clause and you can go to the bailiff avoiding all court proceedings. The said statement is also appropriate with combination with other collateral (mortgage, pledge, etc.), which significantly reduces the time of court proceedings and obtaining an enforceable title in order to satisfy these specific safeguards.