Every year, domestic companies issue billions of crowns worth of bonds. The interest rate appreciation on these bonds often exceeds 5%, sometimes even approaching the 10% mark. However, as the examples of some Czech brands such as Zoot or EMTC show us, these securities are not always reimbursed, resulting in a debt reaching hundreds of millions.
The state gives a warning
At a time of inflation starting to pick up speed again, bonds represent to investors an attractive possibility of gaining value for their money. But those promising higher interest rates and claiming there is no risk are not telling the truth. This fact is even being pointed out by the Ministry of Finance, which wants to protect the public from such investments and is therefore promising to fight against so-called fraudulent corporate bonds.
Open in gallery (3)
Mužská ruka podepisující smlouvuSource: Freepik
What does this step mean in practice? The issuer shall now be obliged to provide information about its business focus and the duration of its business activity on its website. Even more important is the obligation to publish the last two final accounts. This will, among other things, allow us to know where the company actually stands financially, i.e. whether it is already over-indebted at the time of issuing new bonds.
Pronájem mezonetu Josefov 2+kk, Praha, Praha 1
Show property
Jana Brodani, Executive Manager of the Capital Market Association, flags up this problem as well.
"As of today, inexperienced investors have an estimated several tens of billions of crowns invested in these high-risk corporate bonds, the so-called ‘rotten bonds’."
Lost investments
Companies usually argue that they need the money from the securities for further development. Few of them will admit that there may be other reasons – for example just being able to afford their own operations. The result can be downright tragic. In the case of the bankrupt company EMTC, which had assets worth about 200 million crowns, the amount owed to investors actually reached almost a billion crowns!
Another notorious case is that of the e-shop Zoot, which owed almost 240 million crowns to its bondholders. These investors received back only a tenth of what they had invested in the company. And even that was only thanks to a new investor, who acquired a controlling stake in the company, turning up.
Open in gallery (3)
Mužská ruka podepisující smlouvuSource: Freepik
"Every week we’re approached by many companies interested in issuing bonds. We reject 80% of them right away and continue to negotiate with the rest," said Jiří Helich from Ceskedluhopisy.cz (Czech bonds.cz), a company long-term involved in this market segment, a while ago. He‘s probably referring to the fact that sometimes there even appear fraudulent companies that never planned to reimburse the bonds in the first place. In addition, when a company becomes insolvent, the holders of unsecured bonds are the last ones to get their debts repaid.
10 key recommendations for investors
To avoid such situations, experts recommend "checking out" the issuer beforehand. Don’t worry – you don’t need an economics degree to do this. All you have to do is follow a few basic rules. These include the following:
Check how established and trustworthy the company is on the market.
The bonds must be registered with the Central Securities Depository. This means that they have the so-called ISIN - the international identification number of the issue.
Read the prospectus of the bond issue approved by the Czech National Bank. This is a fundamental information document for investors. The material should make it clear why the issuer is raising the funds – and if there is no such document at all, then be aware that all may not be well.
Familiarize yourself with the state of the company's books, which should be in the form of audited final accounts verified by an independent entity.
Checking the company's financial indicators will show you whether the issuer has debt, how much money it can dispose of, as well as a lot of other important information indicating its financial health.
Find out the liquidity of the bonds in advance. That is, how quickly and under what additional conditions they can be sold in the future.
Complete the investment questionnaire accompanying the bond issue. A part of this document is information about your attitude towards the risks of the whole investment.
If the bond has a suspiciously high-interest income, such an investment might not always be the most profitable and trustworthy.
You definitely shouldn’t invest all of your funds in bonds. Always keep a financial reserve high enough to cover any shortfall in your income for at least six months.
If you are worried or have any suspicions related to bond investments deep down, choose a more conservative way of depositing your money. Above all, when making decisions, always use your common sense and go with your instinct.
Open in gallery (3)
Šťastný muž rozhazující kolem sebe bankovkySource: Freepik
The Czech economy might not return to its pre-pandemic level until next year at the earliest. Moreover, the figures for April indicate inflation exceeding 3%. Therefore, the temptation to invest in bonds, seen as the "safe haven", shall be high in the following season. However, never forget that no securities are ever completely risk-free.
Source: Czech Capital Market Association, hardyn.cz, e15.cz, iDnes, statnisprava.cz
