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Konstantin Y. Smolentsev
SMOLENTSEV & Partners » Press Centre » Publications and Speeches »

Corporate aspect of successful relase and circulation of “club” bonds

Konstantin Y. Smolentsev
Doctor of Political Sciences, the Academician of IIA, ÑÌÑ
Chairman of the Board of Directors of
IC “SMOLENTSEV and Partners”
http://www.smolentsev.com/ 

For actively developing average business, a problem of attracting capitals is one of the most challenging. This problem is directly connected with forming wide field of institutional investors, which depends on a specter of financial tools offered by share market. One of the ways of long-term financing is bond release. Today, on the Russian financial market large releases of bonds are circulated, usually at least 1 billion rubles. Such volume of emissions is explained by high cost to organize the release, and developed priorities of main investors in ruble bonds – credit organizations. However, for average companies “blind” following to “blue” chess pieces often is economically inexpedient, and even counter-indicative. Unpredictability of trends on share market, presence of offers, excess of actual investment needs, not provided by a safe level of monetary streams and profit of the company are only the basic risks of a borrower.

What are the ways to level out given risks, what decisions may become alternative for average companies? The solution to this problem is release of “club” bonds, some sort of an intermediate financial tool between syndicated credits and “classic” bonds.

In parameters of release of “club” bonds it is possible to define following conditions. 

First of all – volume of release of bonds should correspond to real investment needs of a company-emitter and be within the limits of 50 to 500 million rubles. Then both the borrower and investor will precisely understand target use of resources. That is already a serious guarantee of successful realization of plans for strategic development and return of investments with stipulated profit.

Second. Because the attracted means are used for business development, then it is important for both investor and the borrower that there will be no unpredictable financial force majeure or cash breaks not dependent on scheduled activity of the borrower. In other words, traditional principle of using offers, i.e. opportunities to pay off bonds before deadline if the creditor wants to, is unpleasant for average business, because it is impossible to quickly “intercept” money on a market – too much money taken as a credit, it is impossible to redirect financial streams from other businesses because of the absence of those businesses, financial conditions of shareholders does not allow to cover those risks with own means. Now, what to do? Average term of bond circulation is 2-3 years. In world practice, the term “covenants” is widely used i.e. obligations of the emitter to correspond to certain limitations in the sphere of financial parameters and separate aspects of activity, at which infringement creditors have a right to require a pre-schedule execution of obligations. For each emitter covenants are chosen individually. In our conditions, it is more expedient to count covenants on the basis of a quarter accounting report of an emitter and his guarantors. This excludes ambiguity in treatment of calculating parameters. For example, it is possible to recommend such covenants, like the relations of pure debt to pure actives, or a pure judgment debt to EBIT. Accompanying positive effect of using covenant mechanism is increase of quality of finance management of a company-emitter.

Third. For the covenant mechanism to work, information openness should be provided, i.e. voluntarily taken responsibility by the company-emitter to regularly, for example, once in a quarter to publish information in mass media about its activity and financial results. It allows to support active communication of emitter with investors during the entire cycle term of bonds.

Fourth. Cost of organization of releasing bonds and circulation for an average business has to be less expensive than regular “classic” accommodations. This is reached through direct “closed” signing among limited circle of investors, some sort of a “club” accommodation of bonds.

Fifth. It is important for investors to support secondary market that coincides with emitter’s interests on formation of public credit history. Secondary market can be maintained by means of Stock exchange RTS, for example RTS Board by principle of “club platform”, or can be organized on the platform RTS START after registration of prospectus of securities.

Sixth. Speaking of the emitter of “club” bonds, we mean that he has to have stable financial position, business has to be profitable, structure of property has to be understandable, corporate risks – moderate, scale of business has to start at 250 million rubles per year with stable tendency for growth.

Thus, release of “club” bonds provides comfort financing of an emitter and offers investors a financial product with understandable limited risks and profit, which usually is higher than analogical “classic” product.

I, as a person, who used to run bank and investment-financial businesses, and today being a professional business-consultant, understand desires and fears of emitters and investors. Investors, in my mind, are associated with suffering from thirst humanity, which is not satisfied with traditional sources of potable water and which has an obsessive idea to transport an arctic iceberg, as a huge source of fresh water resources back to their tropical countries. And to do so, they rent a ship (usually a stock market), define the captain (financial consultant) and… start demanding guarantees! Guarantees, that they will make their way to the iceberg, and unwanted risks of collision will pass them by. But not to run into an underwater part of an iceberg it is necessary to have at least a map of an underwater part of an iceberg and a sonic depth-finder. However, it is not a part of standard work of a captain. And nature, i.e. iceberg does not forgive amateurishness… Where am I going with this? Standard attractiveness of financial tools is based on data, resulted from investment memorandums at accommodation. Data, shown to us “today”. But with information about “yesterday”!!! Hence – required guarantees of investors – is just a past experience of work of an emitter. What are the consequences? On fast growing markets, which is also Russian, very often we meet with one of the most typical reasons of loss of market positions of many corporations, connected with a “break” between industrial and organizational development. Opportunities given by the market to increase market share, geographical expansion, absorption of competitors allocate aspects of organizational construction on a supporting part. As a result, yesterday’s leader of market becomes an outsider or business completely stops functioning. There are tons of examples. One of the most bright ones – collapse of “SBS-bank” empire, where the role of absorption government agrarian bank wasn’t the last…

Data of an investment memorandum is “yesterdays” guarantees. But what’s going to happen “tomorrow”? When almost fifteen years ago I was buying myself a new watch, I bought Swiss watch, although there were no commercials on this product. Prestige? Partially, yes. Main motive was after all reliability, I knew that mechanisms of Swiss watches work for a long time and are very reliable. And wasn’t mistaken. I predicted the future on the basis of understanding “inner” reliance. Correlating this example with financial market, in use of investors I suggest replacing term "guarantee" with the term "calmness". “Calmness” is CONFIDENCE in “tomorrow”! Confidence in “tomorrow” on the basis of knowledge of inner mechanism of work of a concrete business – its organizational component.

From my point of view, such confidence in the relationship of company-emitter is reached, if there is:

  • Active support  by shareholders of a process of organizational perfection;
  • Active positioning of the top-management, understanding the importance of given aspect and actively participating in the process;
  • Professional and rallied team;
  • Modern techniques of management are applied.

It doesn’t matter how charismatic the leader is, business stability is impossible without implementing in operational activity modern management techniques. It is only in national epos, when Master has grounded a flea, that way showing his unordinary possibilities. What if he had to ground every day a certain amount of those animals, would he be able to do that without according conditions, tools and mechanisms? Obviously, no. It is also clear that on a certain stage of business development leader qualities of the head should be supported with corresponding management techniques. Only in that case emitter will minimize risks in achieving planned targets of development, which means reaching required business profit and carrying out investment obligations.

Market of “club” bonds only arises in Russia. First pilot project is organized by our corporation with number of partners – release of “club” bonds of a seed agro-holding GC “AgroIntel”. Today it is a successful example of counter movement of innovations of a share exchange and average business! In relations to a given concrete emitter, is it an accident or a “law”? A little bit of history. More than two years ago our Corporation “SMOLENTSEV and Partners” was invited by the owners of “AgroIntel” to develop and implement Balanced Scorecard – BSC system. Thus, “contemporary history” of business formation has been carried out not only in front of our eyes, but also with our direct participation. Ultimate goal, which has been put before us is consulting support of formation of a public huge (on a world’s scale) famous innovative seed agro-holding. What was carried out by the owners and top-management of the agro-holding with our help during this time? Or to be more correct: what intermediate stages and actions have been realized to achieve a final goal? Dynamism causes respect! In the past years, root technologies of manufacture were implemented and improved; plan for strategic development was developed and strategic business management was implemented. Group of companies has entered international market – on the fields of “AgroIntel” Canadian grades of leguminous cultures are being tested, and on Canadian fields – “AgroIntel” seeds. From a group of isolated companies a holding structure was formed. Creditor debts (and this is while business is completely seasonal, and accordingly there are peaks of payments loans!) are grammatically restructured. Step by step, we were working on formation of investment appeal of the business and as a result – it’s the second year already when bill loans have been successfully working; a year ago a bank long-term project financing has been open for construction of a unique, having no analogues in Russia factory on completion of seeds. Actively and efficiently modern management techniques are implemented – Mechanism of Active Innovative Self-Development; managing Key performance indicators. Great result has shown an implemented year ago “Program of quality”. A complex program to minimize risks in being realized. Balanced Scorecard is being successfully implemented not only on the holding level, but also cascading up to each division and employee. Automatic system of Enterprise Resource Planning is being implemented, including IT-support of BSC technique. Motivational-development approach is being realized in managing personnel.

What do those achievements give to emitter and investor?

The emitter provides conformity of an organizational component of business to the industrial development, i.e. raises stability of business. It is the realization of a principle of active balanced development.

Such approach gives the investor that "calmness", i.e. understanding mechanism of development and, accordingly, confidence of realization of developed plans, confidence in successful "tomorrow" for his investments.

For GC “AgroIntel” today’s stage of development – is a release of “club” bonds. Ahead there are “classic” bonds; attracting a strategic investor; public release of shares; achieving the status of seed agro-holding #1 in Russia; entering the top three-five largest seed-growing companies of the world.

Fantasies? Reality. Confidence!

Because there is a desire, market gives opportunities and techniques to achieve success are understandable and are being realized! I very much like the statement of the General director of GC “AgroIntel” A.N.Chalkov: “Of course, nothing’s easy, but there are goals and understandable actions, but most of all, there is full confidence in making the right choice”.

That was about “tomorrow”!



National Business, April 2008

Republications:

I ¹1, May, 2008

E-xecutive,  May 23, 2008  http://www.e-xecutive.ru/knowledge/announcement/754676/ 

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