It is believed that the purchase of bonds is a worthy alternative to bank deposits, which offers increased returns and carries virtually no risks. However, experienced investors know that everything is not so simple and far from all answers lie on the surface. For example, subordinated bonds carry increased risks. This is important to consider before acquiring debt securities.
Definition
Subordinated bonds are issued by various companies. As a rule, by banks. The main feature is the increased yield relative to other types of similar securities. The purchase of subordinated bonds is preceded by the opening of a special account to which funds in the appropriate currency are deposited in advance. Organization issuing securities, this allows you to save your own money on subsequent conversion.
The risks
However, tempting profit carries certain risks. In the event that the company issuing subordinated bonds is faced with financial turmoil, the owners of this financial instrument are at the end of the queue for receiving payments.
For example, in the event of bankruptcy, the funds are first returned to depositors, then to ordinary bond owners. The bank's subordinated bonds qualify for appropriate payments only after settlements with previously named objects. You need to understand that in this case, potential investors risk losing their own savings and not getting compensation.
It is curious that the cancellation of subordinated bonds is possible even without bankruptcy proceedings. If the organization is experiencing financial problems, no one prohibits the appropriate procedure. At the same time, holders of securities will lose their own savings. Even more interesting is the fact that such actions are legal, and it will not work to attract a company that wrote off subordinated bonds.
Coupon payments also remain a big question if the standards of a credit institution fall to a critical level.
So, you need to understand that the owners of subordinated bonds carry enormous risks that justify increased returns. That is why you need to purchase them with extreme caution, carefully checking the reputation of the company. This will at least slightly reduce the risk of losing your own investments. Trust should be trusted to the players, and not to those who do not live up to expectations and do not fulfill their obligations.
Buy Prohibition
At the moment, absolutely any potential investors can purchase subordinated bonds. Both qualified and unskilled.
However, the Central Bank plans to ban such transactions. In this case, unskilled investors will not be able to purchase subordinated bonds. The Central Bank motivates this by the fact that such players in the stock market do not have enough experience and knowledge to critically assess the possible consequences of acquiring such securities.
purpose
Subordinated bonds are issued to attract additional financial resources that are needed for further business development. Despite the availability of other methods, this option often becomes the most acceptable for the company.
It is worth paying the attention of potential investors to the fact that the very fact of issuing subordinated bonds can tell a lot.First of all, this eloquently suggests that the banking organization (after all, most often they issue these types of securities) is experiencing some financial difficulties.
That is why the decision to purchase subordinated bonds must be carefully considered.
Alternatives
In addition, the bank has several other ways to attract the missing funds.
- Additional issue of shares with subsequent placement on the stock exchange. However, in this case, the company risks a negative effect. It is possible that the main holders of securities capital will be swept away and as a result of the above actions the share of the package will decrease.
- Issue of ordinary bonds. It allows you to attract borrowed funds, but at the same time imposes obligations on the timely payment of coupon income to holders of securities. In some cases, it is not possible to produce an additional issue of bonds due to the high debt level of the enterprise.
Under such conditions, subordinated debt securities seem to be the most acceptable option. I must say that they are relatively easy to issue and place for sale on the stock exchange. In addition, this process is faster than in the two above methods.
Features
When wondering how to distinguish subordinated bonds, one needs to pay attention to the maturity. Usually it is at least 5 years. In some cases, even more than ten. There may also be perpetual bonds on the market that do not have a clear maturity date. Holders of subordinated securities are offered annual payment of fixed-income profits.
To buy or not?
In the case of subordinated bonds, this question cannot be clearly answered.
You need to understand that this type of securities has advantages and disadvantages.
On the one hand, potential investors are scared by the increased risk. Indeed, if an enterprise goes bankrupt, it is highly likely that holders of subordinated bonds will be left with nothing. But at the same time, their risks are less than those of stockholders who are claiming payments last.
There is another side to subordinated bonds, which implies higher returns for potential investors. No bank deposit is able to offer a similar interest rate. Especially when it comes to purchasing foreign currency bonds.
Based on the foregoing, it is easy to conclude that the main criterion should be the reputation of the company issuing debt securities. The more reliable the corporation, the higher the likelihood that the investor will be able not only to timely return the face value of previously acquired subordinated bonds, but also receive regular coupon payments.
Professionals who make money in the stock market recommend following the rule of diversification. In practice, this means that an investor, especially a beginner, should not invest all available funds in the purchase of only subordinated bonds. It is necessary to distribute risks across several financial instruments. Then in the event of bankruptcy of the enterprise and the inability to return previously invested funds, you will not lose all the savings, but only some of them.