Designingacorporatebond

Howtodesignacorporatebondtoattractadditionalcapitalfromthemarket.

ThomasSmit

MasterthesisUniversityofTwente

Maart2016

Colophon

Research type: Master thesis

Date: 06-03-2016

Author: Thomas Smit

Student no: 1027808

E-mail: t.o.smit@student.utwente.nl

Study program: Industrial Engineering and Management Specialization track: Financial Engineering and Management

Exam Committee

First supervisor: H. Kroon Faculty of Behavioural, Management and Social Sciences University of Twente Second supervisor: P.C. Schuur Faculty of Behavioural, Management and Social Sciences University of Twente External supervisors: Th. L.E. de Cock Partner De Jong & Laan

Abstract:It ishardlypossibletogiveatotalviewofmythesiswithoutreadingtheconfidentialpartsbut I will trymy best to give a brief summary of the process in this paper. The thesis iswrittenforaprivateequityfirm,whichcannotbereferredtobyname,andtheinformationinthethesisisconfidential.Thispaperwillgiveanideaaboutthechosenpathinwritingthethesis.The goal of the thesis was to design a corporate bond for a non-listed firm to attractadditionalcapitalfromthemarket.Theresultoftheresearch isabondwithrelatedcreditrating,conditionsandprospectus.Themarketinterestrateishistoricallowandtherefortheinvestors are looking for alternatives to invest their money. The banks are reluctant toprovide credit to SMEs. Banks usually only grant credit if there is already long-term debtincludedinthecompany.Thesetwofactorshaveleadtoanincreasingnumberofnon-listedcorporatebonds.Acreditratingmodelisbuilttoapproachthecreditratingofthebondandtoidentifyallthedifferentkindsofrisk.Themaincomponentsofthemodelaretheprofitability(rateofreturnon capital), the solvency and the liquidity. The model is completed with several othervariablesthatinfluencetheriskofthebond.

AcknowledgementsThis thesis was the last assignment to finish my study Financial Engineering andManagementattheUniversityofTwente.I would like to thank de Jong & Laan Corporate Finance for the possibility to do thisgraduationproject.Special thanksgotoTheodeCockandmycolleaguesof thecorporatefinance department. They really supportedmewith their feedback and advice during theprocess.Even though I cannot mention the private equity firm by name, I want to thank all thepeopleofthefirmIworkedwithfortheguidanceduringtheprojectandthehospitality.Iwouldalsoliketothankmysupervisorsfromtheuniversity,HenkKroonandPeterSchuur.SpecialthanksgoestoHenkforfeedbackandtheoriginalandinspiringplacestomeet.LastbutnotleastIwanttothankmygirlfriend,familyandfriendsfortheirsupport,feedbackanddistractions.

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Inhoud

1. Introduction ....................................................................................................... 6 1.1 Background .................................................................................................................... 6

1.1.1 Peer-to-peer business lending ................................................................................. 6 1.1.2 business lending ...................................................................................................... 6 1.1.3 Crowdfunding ........................................................................................................... 6 1.1.4 Real estate fund ....................................................................................................... 6 1.1.5 Issuing of shares ...................................................................................................... 6 1.1.6 Bonds ....................................................................................................................... 7

1.2 Problem statement ......................................................................................................... 7 1.3 Research questions ........................................................................................................ 7 1.4 Research Design ............................................................................................................ 9 1.5 Structure ....................................................................................................................... 10

2. Knowledge base .............................................................................................. 11 2.1 Corporate Bond ............................................................................................................ 12

2.1.1 Definitions .............................................................................................................. 12 2.1.2 Bonds ..................................................................................................................... 12 2.1.3 Coupon .................................................................................................................. 13

2.2 Risk management ........................................................................................................ 14 2.2.1 Kwalitatieve risico's ................................................................................................ 14 2.2.2 Bond versus Risk ................................................................................................... 15 2.2.3 Credit rating model ................................................................................................. 16 2.2.4 Rating model .......................................................................................................... 18

2.3 Market interest rate ...................................................................................................... 19 2.4 Laws and regulation ..................................................................................................... 21

2.4.1 Fiscal issues .......................................................................................................... 22 2.5 Rate of return ............................................................................................................... 24

3. Framework bond ............................................................................................. 26

4. Introduction issuer ......................................................................................... 26

5. Designing the bond ........................................................................................ 26

6. Conclusion ...................................................................................................... 27

7. Recommondations .......................................................................................... 29

8. Bibliografie ...................................................................................................... 30

Appendix I: Prospectus ........................................................................................... 32

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1. Introduction1.1 BackgroundTheresearchwasconductedonbehalfofaprivateequityfirmandunderthesupervisionofdeJong&LaanCorporateFinanceandtheUniversityofTwente.Themaingoaloftheresearchistodesignafiancialproducttoattractadditionalcapitalfromthemarket.Theprivateequityfirmisanon-listedfirm.There aremany types of alternative funding for firms thatwant to attract themoney from themarket. Anoverview of the most common forms of financing can be found on the website of 'de NationaleFinanceringswijzer' (www.nationalefinancieringswijzer.nl). There is made a pre-selection between thesefundingsbasedontheneedsoftheprivateequityfirm.Themost importantforthefirmisthatthedirectorswillretainallcontrolofthecompany.Basedonthefirstinterviewsthefollowingkindoffundingareselected:

Figuur1-Funding

1.1.1 Peer-to-peerbusinesslendingPeer-to-peerbusinesslendingisonewaycompaniescanusetoborrowmoneyfromprivateindividualsorothercompanieswithouttheinterventionofatraditionalbankoffinancialinstitution.Theloanisusuallydividedintosmallerpiecesandanindividualcantakeapartoftheloan.Theexpectationisthatthemarketofthepeer-to-peerbusinesslendingwillconsistof40billioneuro'sin2016.(2015,juli,https://www.fundingtree.co.uk/peer-to-peer-business-lending)1.1.2 businesslendingAfundthatworkswithbankstoborrowmoneytoentrepreneurs.Banksdonotlendthefullamountrequestedby the company because for example, de company already have tomuch long-term debt in the company.(Nederlandse Vereniging van Banken, 2015, https://www.nvb.nl/nieuws/2015/4090/nieuwe-financieringsmogelijkheden-voor-het-mkb.html?cookie=set).1.1.3 CrowdfundingCrowdfunding is a funding in which money is collected from many people ; "the crowd". (Kamer vanKoophandel, 2015, http://www.ondernemersplein.nl/ondernemen/geldzaken/hoe-komt-u-aan-geld/info-en-advies/externe-financiering/crowdfunding).Theywant to investanamount ina companyorprojectbecausetheyhavesympathyfortheprojectandcanmakeatthesametimeansmallreturn.Itmaybealoan,shares,ordonation.Usuallypeopleinvestincrowdfundingrelativelysmallamounts,aroundathousandeuros.1.1.4 RealestatefundArealestatefundisengagedininvestingmoneyinrealestatelikeofficebuildings,shoppingmallsorhouses.Thepropertyservesascollateralandthefundearnsmoneyontheleaseortheultimatesellingofthepropertyataprofit.1.1.5 IssuingofsharesTheissuingofsharecaninmanydifferentforms.Ashareisasecuritywhichrepresentsapartofthecapitalofthe company (Dutch Encyclopedia). The shareholders are entitled to dividends and have voting right in thegeneralshareholdersmeeting.Withthe issueofsharesyousellapartofyourcompanytoanother.Beforea

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companymay issue shares, it is reviewedby theAFM.Aprospectusmustbepreparedwith all the relevantinformationfromthecompany.Goingpublicisforacompanytimeconsuminganditisnotprofitablewhenthefirmislookingforarelativelysmallloantoberepaidwithinfiveyears.1.1.6 BondsA corporate bond is long term debt (Brealey, 2008). There aremany different types of bonds andwith thedifferent types thebondholderwill receivealsodifferent rights. Listedandnon-listed firms can issuebonds.Thebondsofalistedfirmcanbetradedontheexchangemarket.Issuingbondsbyanon-listedcompanyisalittlebitmorecomplexbecausethereisnotaexchangemarkettotradetheproduct.Howevercorporatebondsareincreasinglypopularduetothecurrentfinancialsituation.Companiescannotalwaysborrowmoneyfromthebankanda savingsaccountyieldsaminimumreturnanymore.The interest rateona savingsaccount is0.6%(Rabobank,January2016).1.2 ProblemstatementDue to the economic crisis and the uncertain near future, it is nowmore difficult for companies to borrowmoney at the bank in comparison with before the economic crisis. Banks have to deal with higher capitalrequirementsandahigherleverageratiowiththeintroductionofBaselIIandIII(McKinsey&Company,2010).Banksarequite reluctant toprovide riskier loans.Theclientacquirescompanies in theDutchmanufacturingindustry. For theacquisitions theyneedmoney, and thebank is reluctant toprovidemoney for this kindofriskyinvestments.Theclientwillthereforeissueabondtoborrowmoneyfromprivateinvestors.Whenadebtisincludedinthecompany,thebankismorewillingtoalsoprovideanadditionalloan.Theproblemstatementofthisthesisis:“Howtodesignaframeworkthatcanusedtoissuingnon-listedcorporatebondsandhowcantheframeworkbeusedtocreateacorporatebondfortheclienttoattractadditionalcapitalfromthe

market"1.3 Researchquestions A set of sub questions are created to solve this problem in a structuredway. The key aspects of themainproblemarethesortofcorporatebond,thecreditandotherrisks,theconditionsofthebond,themarketandthelawsandregulations.Thefollowingsubquestionsareset:

1. Whatisthecorporatestructureoftheclientandwhatarethepurposesforthecomingfiveyears?o Whataretheneedsoftheclient?o Whatarethegoalsofthedifferentcompanies?o Whataretheinvestmentcriteria?o Whatarethegoalsforthenewacquisitions?

2. Whatarecorporatebondsandwhichsortisthebestforthebusinessoftheclient?

o Whatkindofbondsexist?o Whataretheconditionsofthedifferentbonds?o Whichbondfitsbestwiththecompanyoftheclient?

3. Whichriskscanbeidentifiedforthedifferentsortsofbondsandhowcanacreditriskmodelbe

createdforanon-listedcorporatebond?o Whataretherisksexpressedinaqualitativeway?o Howcantheriskbetransformedintoamodel?

4. Whichregulationappliestoissuinganon-listedcorporatebond?

o Whichlawsareinvolvedinissuingthebond?o Whichtaxesmustbeconsidered?o WhatdoestheAutoriteitFinanciëleMarkten(AFM)sayaboutacorporatebond?

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5. Whatistheeffectofachangingmarketinterestrateonthebondissuance?o Howwillthemarketinterestratefluctuateintime?o Whichfactorsinfluencethemarketinterestrate?o Howcanthemarketinterestratebepredictedforthecomingfiveyears?o Whatistheinfluenceofachangingmarketinterestrateonthepriceofabond?

6. Whatismoststructuredwaytodeterminethecouponrateofthebond?

o Isthecouponratejustthereflectionoftherisk?o Howdoesthemarketinterestrateinfluencethecouponrate?

7. Howtodesignaframeworktocreatenewbondsinthefutureinanefficientway?

o Whatarethefactorsfortheframework?

8. Howcantheclienttakecareofthebondemission?o confident

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1.4 ResearchDesignThepurposeofthisresearchistodesignanalternativefundingforaprivateequityfirmintheformofabond.The researchwill consist of a knowledge based part, a design part and field testing. First in the knowledgebasedpart a research is done to the characteristicsof a corporatebond. The theoretical part consist of thelaws,regulations,theoriesandmodelsaboutanon-listedcorporatebond.Agoodstructuredbondwillprovideamutualbenefitbetweentheinvestorandtheissuerofthebond.Theissuerswantstoattractmoneyfromthemarketat thecheapestpossible rateandthe investorswants thebiggestpossible return.The"designcycle"mustprovidetherightfitbetweenthe"environment",theinvestmentmarketandthe"KnowledgeBase",theframes,likelawsandregulations,foracorporatebond.Inthisresearchthe"Threecycleviewofdesignmodel"isused(Hevner,2007).

Figuur2-ThreecycleviewofdesignmodelHever

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1.5 StructureSomevalidationroundsareperformedtogetfinallythebondthatcanbeissuedbyanonlistedcompany.Thenumbers in the upper left corner refer to the research question that is being answered in the steps of theprocess.Inthetheoreticalframework,Chapter2,thegreencollaredstepsareelaborated.First is inventoriedwhat kindofbondsexist andwhat the characteristicsof thebondsare. Investingmoneyinvolvescertainrisks,andtheserisksarequalitativelyexpressedinthesecondstep.Afterthevarioustypesofbondswiththeirpropertiesandrisksareidentified,thedifferentkindofbondsarecomparedwiththelawsandtaxregulations.Thefiscalaspectsaredecisivefortheeventualrateofreturnofthebond.Thenthemarketratehasbeenexaminedbecausemarket interestrateswillaffectthevalueandthecouponrateofthebond.Thecredit ratingmodel is used as an internalmeasurement tool todetermine if the coupon rate is an accuratereflection of the risk associated with the bond. The process for designing the bond looks schematically asfollows:

Figuur3-Structurethesis

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2. KnowledgebaseInthispartthegreencollaredstepsinfigure2willbeexploredaccordingtotheavailablescientific literature.Thispart istherigorcycle fromthemodelofHeverandwillgivepartof theanswers to the research questions 2 till 7. In the end thesuccessof thebonds isdependentof theprofitability for theinvestor. The rate of return is influenced by; themarket, derisks,deconditionsofthebondandthelawsandregulations(figure4).

Figuur5-structureknowledgebase

Figure5givesanoverviewofhowtherateofreturnisinfluencedintheprocess.Thischapterwillpointoutallthedifferentelementswhichinfluencetherateofreturn.

Figuur4-opbouwrendement

Confidential

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2.1 CorporateBondThe bondholder lends an amount of money, thenominalvalue,totheissuerofthebond.Inreturn,the bondholder will receive an annual couponpayment an at the end of the contract, thebondholderreceivesapercentageofthefacevalueback.Thecouponpaymentsandthepercentageofrefund depends on the kind bond and theconditionsofthebond.2.1.1 DefinitionsThefollowingdefinitionsareused(beleggerswoordenboekRabobank,2015):

• Issuer:Theissueristhecompanyofinstitutionthatwillissuethesecuritiestothemarketandtheonewhowillreceivetheloan.Thecompany'snameisalwaysmentionedonthephysicalshares.

• Coupure:Thecoupureisthevalueofonebondandinvestorscanbuyoneormorecoupuresdependentonthetermsofthebond.

• Nominalvalue:Thenominalvalueisthevaluethatiswrittenonthebond,alsonamedthefacevalue.

• Issuingcosts:Issuingcostsaretherecurringcoststhatmustbepaidforthetransactionsofthesecurities.

• Pari:Pariisthefacevalueofthebond.Abondpriceequaltothefacevalueiscalledàpari.

2.1.2 BondsTherearemanytypesofbondsandabondismadeupofvariouscomponentsandconditions.Theconditionsofthebondslistedbelowcanalsobecombined.Themostcommonbonds:PerpetualBondAdistinctioncanbemadebetweenabondloanwithanagreedtermorindefinitematurity.Aperpetualbondisa loanwithaeverlastingmaturity (BeleggerswoordenboekRabobank,2010). Theannual coupon rate is theinterestonthenominalvalueoftheissuedbond.Aclausecouldbeincludedinthecontractwhichstatesthatthebondsmayberedeemed.Thistypeofbondisusuallyreferredtoasasubordinatedloan.SubordinatedbondInasubordinatedbondinvestorstakeagreaterriskbecauseinthecaseofabankruptcythebondholdercannotclaimtheinvestedmoney.Usuallythismeansthattheinvestorwilllostthemoney.Thishigherriskwillgiveahighercouponrate.(Brealey,Stewart&Franklin,2010)Zero-couponbondsInazero-couponbondthereisnopaymentofacouponrate.Instead,youcanbuythebondatapricebelowthenominalvalueoftheproduct.Therateofreturnisthedifferencebetweenpurchasepriceandthepay-outvalue(Hull,2011)ConvertiblebondsConvertiblebondsarebondsthatcanbeconvertedatanagreedtimeinstocksofthecompany.Eachbondwithacertainfacevaluecanconvertedintoapredeterminednumberofshares.canthanapredeterminednumberofsharestobeacquiredeachbondwithanominalvalue.Thecouponrateislowerthannormalbecausethisformcanbenefitfromtheincreaseintheunderlyingstock.(Kat,2001)

Figuur6-focuschapter2.1

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Example:BondXhasanominal valueof€10.000. Thebond canbe converted into250 sharesof the companyX. Theconversionrateis10.000/250=€40.Supposetheunderlyingshareincreasefrom€40to€45,thenewvalueofthebondisthan45x250=€11.250andtheprofitis€1250.ReversedconvertiblebondThe reversed convertible bond gives not the bondholder the right to convert the bond into shares but theissuerofthebond.Ifthepriceoftheunderlyingstockpricewilldecrease,theissuerofthebondwillconvertthebondintosharebecausethepriceofashareislessthanthefacevalueoftheshares(Hull,2012).CallablebondForacallablebond,thebondissuermay,undercertainconditions,earlypayoffthedebtofthebond.Thepricewillbeabovetheparvalueofthebond.Abondisbeneficialtopayoffearlyifthecouponrateishigherthanthecurrentinterestrate.(Hull,2012)CoveredbondThecoveredbondwillgivethebondholdermorecertaintyontherepaymentofthedebt.Thephysicalassetsofthe company are used as collateral for the bond. In thisway, the bondholder less risk but receives a lowercouponrate.(Brealey,Stuart&Franklin,2010)BondwithcompensationinkindBusinesses are becoming more and more creative in paying back the loan and paying interest payments.Increasingly,companieschoosetorepayinkind,whichtheinvestorwillnotgetanymoneybackbutinsteadaproductfromthecompanyinwhichitinvests.Spykercarcompanycamein2014inthenewswhentheissueoftheSpykerVenatorbondswasannounced.Spykerwould fetch12million, the repaymentwouldbedonebymeansofthelimitededitionSpykerB6Venatorcar(FinancieelDagblad,maart2014).2.1.3 CouponThecouponsareperiodicpaymentstothebondholderinexchangeforthemoneyborrowed.Thetermcouponstillcomesfromthetimethebondwasissuedonpaperandyou'renexttothemantle,thesecurity,acollectionof receipts, coupons, received that could be exchanged for the regular pay-out. The coupon payment isexpressedasapercentageofthenominalvalue.A€1,000andannualcouponof4%bondwithanominalvaluepaysexample,aninterestrateof40eurosperyear.Thecouponrateofthebonddependsheavilyontheriskofthebuyerandwhatthebuyeriswillingtopayforthebond.Thefinancialhealthofthecompanydeterminestheriskwiththeotherriskslistedundertheheadingrisk bond. In addition, the value of the bond is affected by fluctuations in the interest rate which againindirectlyinfluencedthecouponrateofthebond.Bondwithalongermaturityhaveahighercouponratethanbondswithshortermaturitiesbecausethereismoreuncertaintyforalongerduration.Themostcommoncouponratesare:FixedcouponrateDebondholderwillgetafixedpercentageofinteresteachyear.Thefixedcouponratedoesnotchangeduringtheperiod(Brealey,Stuart&Franklin,2010).FloatingcouponrateWith a floating coupon rate the interest rate is variable. Interest rates may fluctuate during the term andusuallythissurgeininterestrateslinkedtomarketrates.(Hull,2011)ZerocouponrateThe zero coupon bondwill not pay any interest rate. The rate of return in this sort of bonds is a one-timepaymentatmaturity.Theamountpaidatmaturity ishigherthantheamountoriginally investedbythebondholder(Hull,2012).BonusThebondholderwillgetanadditionalbonusatmaturityincasecertaingoalsarereached.(Brealey,Stuart&Franklin).

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2.2 RiskmanagementThereareanumberofrisksthatneedtobetakenintoaccountwhen buying a corporate bond. The investor wants a rate ofreturn commensurate to the risk that the investor takes byinvestinginthebond.Theriskofinvestinginacorporatebondis mentioned in this section. The risk will be expressed in aquantitativeandqualitativeway. Thebiggest risk is thecreditriskandthisriskwillbedeterminedwithacreditratingmodel.The ‘Autoriteit Financiële Markten’ (AFM) states that all therisks that are related to the firm must be included in aqualitativewayintheprospectus.2.2.1 Kwalitatieverisico'sCreditordefaultriskCredit or default risk is the risk that a bond issuer will fail tomake the coupon or principal payments anddefaultonthebonds(U.S.SecuritiesandExchangeCommission(SEC),2014).Creditratingagenciesreviewthebondsandgive the issuer andbonda credit rating. The rating isnot a guaranteebutwill givean indicationaboutthecreditrisk.Companieslabelledwithagoodratingcanusuallyissuebondswithalowinterestrate.InflationRiskInflationriskistheriskofadeclineinpurchasingpower.(SEC,2014).Withtheamountofmoneyreceivedatmaturity the investor will purchase fewer goods and services than before. In general, when the inflationincreases,theeffectiverateofreturnwilldecline.LiquidityRiskLiquidityriskistheriskthatitisnotpossibletosellthebondatanymomentintimeforcashandreceiveapricethatreflectsthetruevalueofthebond.Abondthatisnottradedonanexchangehaveahigherliquidityriskthanatradedbond(SEC,2014).CallRiskThetermsofabondcangivetheissuertherighttobuybackthebondbeforethematuritydate.Itisnotsurethatthebondholdercaninvestinabondwithcomparableterms(SEC,2014).Theissuerofthebondwillcallingthebondifthemarketinterestrateshavefallenrelativetothecouponrateonthebond.InterestrateriskThepriceofabonddeclinesifthemarketinterestratesrise(Hull,2011).Thisiscalledtheinterestrateandiscommontoallsortofbonds,evenforhighinvestmentgradebonds.Bondswithalongertimetomaturityhaveabiggerinterestrateriskbecausethemarketinterestratecanfluctuatemoreovertime.ValueriskThe non-listed corporate bonds are not traded on a public exchange market and thus the price is notdetermined on themarket. There is a risk that the bond can not valued during thematurity and that thebondholdercannotsellthebondatafairprice,apricethatisequaltothefacevalueofthebond(AFM,2015).FiscalriskTheDutchgovernmentcanmakechangestothetaxation.Itcanbethecasethattheissuerortheinvestorhastopaymoretaxandtheeffectiverateofreturnwilldecline.(AFM,2015).

Figuur7-focushoofdstuk2.2Confidential

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JuridicalriskThe issuer could be sued in court and a gooddefencewill always costs time andmoney (AFM, 2015). Theissuerwillalways,regardlessthejudgementofthecourt,havetheriskleadingsomereputationaldamage.Thecostoflitigationcouldleadtoreducedprofitability.OperationalriskOperationalriskistheriskoflossresultingfrominadequateorfailedinternalprocesses,people,andsystemsorfromexternalevents(BaselCommittee,2011).Thepeoplerisks,technologyrisks,legalrisk,physicalrisketcareincluded.Reputationriskandstrategicriskareexcludedfromthisdefinition.ForecastriskThebondswillberepaidseveralyearsafterissuance.Itisimportantfortheinvestortoknowwhatthefinancialprojectionisforthecomingyearsandifthecompanyhasenoughcashflowtopaythecouponpaymentsandinthe end the repayment of the debt. The issuer will make a financial projection to convince the investor.However, noone canpredict the futureexactly and it is possible that the forecasts arenot in linewith thedevelopmentinthefuture.Thefinancialforecastmaydifferbothbyinternalandexternalfactors(AFM,2015).SectorspecificriskEachsectorhas itsownspecificrisk. Investing inaportfoliowith investments indifferentsectorscanreducetherisk.Theriskwillbelessiftheportfolioisdiversifiedandtheinvestmentsaremadeindifferentsectorsandcompanies(Hull,2012).DebtorriskThereisariskthatadebtorcannotpaywhichcanleadtoashortageofcashflowtopaythecouponpaymentinatimelymanner(Vriesendorp,2012).DirectorsriskThedevelopmentandoperationoftheissuerdependsontheknowledgeandexperienceofthedirectors.Thedisappearance of the directors could lead to destruction of capital. This can have a negative impact on thebusinessandfinancialresultsoftheissuer(AFM,2015).2.2.2 BondversusRiskNot every type of risk will affect all the different types of bonds. For example, a covered bond has theguaranteethattheinvestorwillgetbackhisinitialinvestment.Athirdpartyortherealestateoftheissuerwillguaranteethebond.Thecoveredbondistherefornot influencedbythecreditriskbecauseeventhoughthecompanygets indefault the investorwill gethismoneyback.The tablebelowgivesan indicationabout theaffectofthedifferentriskstothebondsidentifiedintheprevioussection.Theriskofthebondishigherifmore"+"areshowedintherelatedcolumn.

Figuur8-Relatierisico'sensoortobligatielening.'+'betekentsubstantieelrisico,'0'eenneutraalrisicoen'-'betekentdatdeobligatienietgevoeligisvoorhetrisico.

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Thesamecomparisonismadeforthekindofcouponpaymentandtherisk:

Figuur9-Relatierisico'sencouponrente

2.2.3 CreditratingmodelIt ishardlypossibletodeterminethecouponratewithaclear formula fornon-listedcompanies.Theratingsand related coupon rate are judgements about the financial situation and future of the firm. There is nogeneral accepted way to calculate the rating and the coupon rate. The coupon rate is influenced bymanyfactorsandthemostcommonfactorsarethemarketinterestrate,thecreditriskandthesupplyanddemandofnon-listedbondsinthemarket.Thissectionfocusesontheapproachtofindawaytodeterminethecreditriskandtherelatedcouponrate.RatingagencieslikeStandard&Poor's,Moody'sandFitchGroupmakecreditratingsforcompaniesandearneachyearalotofmoneybydoingthis.Thecreditratingsarebasedonmanyvariables and as many data of the market. The ratings from Moody’s en Standard&Poor’s and Fitch arecategorizedasfollow:Moody’s Standard&Poor’sandFitch

Investment-bonds:Aaa AAAAa AAA ABaa BBB

JunkBonds:Ba BBB BCaa CCCCa CCC CTabel1-CreditratingcategorieënvolgensMoody's,Standard&Poor'senFitch

Thebondswiththeleastriskhaveatripple-A(Aaa)rating,thesecondbestbondshaveAaratingandsoon.ThebondswitharatingAaatillBaaareinvestment-bondsandthesebondsarerelativerisklesstoinvestin.Banks,pension funds andother financial institution regulatedby the government are only allowed to invest in thehighgradedinvestmentbonds.ThebondswitharatingbelowtheBaaareratedashigh-yieldorjunkbonds.Theriskismuchhigherthantheinvestmentbondsbuttheeffectiverateofreturncanbehigher.

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Bellowisatableincludedaboutthedistributionofthecreditratingsfromcompaniesintheindustrialsector.ThedataisprovidedbyStandard&Poorandshowthemedianoftheratio'soverthreeyears.Thedatacanbeusedtodeterminetheratiosoftheissuerandapproacharelatedcreditratingforthebond.Ratio AAA AA A BBB BB B CCCEBIT/interest 23,8 19,5 8,0 4,7 2,5 1,2 0,4Returnoncapital,% 27,6 27,0 17,5 13,4 11,3 8,7 3,2Totaldebt/(totaldebt+equity) 12,4 28,3 37,5 42,5 53,7 75,9 113,5Tabel2-studieBeaveretall.naarderelatietussencreditratingencontinuïteitvan544ondernemingen

Beaver, McNichols en Rhie did a study to the ratios of 544 companies who get in a default and to 544companies that survived. The studied the ratios for a period of 40 years and concluded that the chance ondefaultinthenextyearisrelativetothechanceonnodefaultinthecurrentyear:

𝐿𝑜𝑔 𝑟𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑐ℎ𝑎𝑛𝑐𝑒 𝑜𝑓 𝑓𝑎𝑖𝑙𝑢𝑟𝑒 = −6,445 − 1,192×𝑅𝑂𝐴 + 2,307× 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠𝐴𝑠𝑠𝑒𝑡𝑠

− 0,346×𝐸𝐵𝐼𝑇𝐷𝐴𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑐ℎ𝑎𝑛𝑐𝑒 𝑜𝑓 𝑓𝑎𝑖𝑙𝑢𝑟𝑒 = 𝑒!"#(!"#$%&'" !!!"#$ !" !"#$%&')

Themost common ratios used by credit rating agencies to determine the credit rating are the profitability(returnoncapital),thesolvencyandthecurrentratio.ProfitabilityThe return on capital gives and indication about the profitability of the firm. The profitability is the ratiobetweentheprofitthatismadeandthecapitalofthefirm(Brealey,Stuart&Franklin,2010):

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 = 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 + 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 𝑡𝑎𝑥𝑒𝑠

𝑡𝑜𝑡𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

Theprofitabilityshouldbebetweenthe5%en10%.SolvencyThesolvencyistheratiobetweentheequityandthedebtofthecompany.Thesolvencyshowsinwhichwaythe company is financed with debt. The distinction is made between the solvency on total capital and thesolvencyonlong-termdebt(Brealey,Stuart&Franklin,2010):

𝑆𝑜𝑙𝑣𝑒𝑛𝑐𝑦 = 𝑒𝑞𝑢𝑖𝑡𝑦

𝑙𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡

𝑆𝑜𝑙𝑣𝑒𝑛𝑐𝑦 = 𝑒𝑞𝑢𝑖𝑡𝑦

𝑡𝑜𝑡𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

Thesolvencyshouldbeabovethe25%Currentratio(liquidity)The current ratio is a liquidity ratio shows if the company is able to pay the short-term and long-termobligations. The current ratio considers the total assets of the company relative to the company's totalliabilities(Brealey,Stuart&Franklin,2010):

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 = 𝑠𝑡𝑜𝑐𝑘 + 𝑑𝑒𝑏𝑡𝑜𝑟𝑠 + 𝑙𝑖𝑞𝑢𝑖𝑑 𝑎𝑠𝑠𝑒𝑡𝑠

𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Thecurrentratioshouldbebetweenthe1,2en1,5.

18

2.2.4 RatingmodelThe Collin credit model (Collin Crowdfund, 2015) is a model based on the profitability, solvency and theliquidity. The credit rating is calculatedbasedon thehistorical financial statements and the forecast for thecomingyears.TheCollincreditratingiscategorizedinthefollowratingscores:

Creditscores Excellent Goed Ruimvoldoende Voldoende Matig

Rentabiliteit 100–61 60–31 30-11 10-2 1–negatief

Solvabiliteit 100–46 45–36 36–26 25–16 15–negatief

Liquiditeit(currentratio) >=1,5 <1,5–1,4 <1,4–1,2 <1,2–1,0 <1,0

Tabel3-BepalingCollincreditscore

Theratingwillbedeterminedwiththefollowingweights:

Weging Excellent Goed Ruimvoldoende Voldoende Matig

Rentabiliteit 40 32 24 14 0

Solvabiliteit 25 20 15 5 0

Liquiditeit 35 28 21 11 0

Maximumpuntenpercategorie 100 80 60 30 0

Tabel4-WegingvoorCollincreditscores

Intheendthesumoftheweightswillleadtoaoverallcreditscore.Thecreditscoreislinkedtoainterestrateinterval.

Score creditscore Renteinterval

100–91 Excellent 3-8%

90–71 Goed 4-9%

70–46 Ruimvoldoende 5-10%

45–21 Voldoende 6-12%

20ofminder Matig 8-14%

Tabel5-Collincreditscoresenhetbijbehorenderenteinterval

TheCollincreditratemodelisthebaseforthecreditratingmodelthatisdesignedinchapter5.

19

2.3 MarketinterestrateThe capitalmarket is an important factor if youwant toissue a corporate bond. The bond should contain theproper terms tobeattractive to investors in themarket.The issuer can offer a lower coupon rate if the marketinterest rate is also low. De investor and issuer areinterested in themarket interest rate because the bondbecomes less worth when the market interest rate willincrease.This sectionwill focusonprediction themarketinterestrateforthecomingyears.Predictingthemarketinterestrateinthelongtermbythetossofacoinismorereliablethanallthemodelsthataremade (Greer, 2015). This indicates the complexity toforecast the market interest rate. The central bankinfluences the market interest rate to control themonetarypolicy.Dedevelopmentofthemarketinterestratewillbeaffectedbytheeconomicfundamentals,themonetarypolicyandtheinternationalflowofcapital(ABNAMRO,2012):Economicfundamentals:Theeconomicfundamentalsthat influencethechange inmarket interestratearethedemandandsupplyofmoney,thenationalsavingsandtheinflation.Theseindicatorsareanindicatorfortheeconomy(ABNAMRO,2012):

1. SupplyanddemandofmoneySupply and demand largely determine the change in the market interest rates. At the momentcompaniesand/or familiessavemoney for future investments, thesupplyofmoneywillbehigherand the interest rates will fall. On the other hand if businesses and / or families have a lot ofconfidenceintheeconomyandwhentheyspendandinvestmoremoney,themoneydemandwillbegreater and thus themarket interest rateswill increase. The government plays amajor role in thesupply anddemandofmoney.A larger public deficitmeansmoredemandand themarket interestratewillincrease.

2. NationalsavingsThemoneyofall the familiesandcompanies surplus thebudgetof thegovernment is calledas thenationalsavings.Ifthepublicdeficitisbiggerthanthenationalsavingsthanthereisanationalsavingsdeficit theotherwayaround is anational savings surplus.Countrieswithanational savings surplushavearelativelowmarketinterestrate.

3. InflationInflation is strongly related to the market interest rate. If someone lends money he/she will getinterestpaymentinreturn.Theeffectiveinterestrateisthenominalinterestratecorrectedwiththeinflation.Thenominal interestrate istheinterestratethat isagreedbetweentheborrowerandthelender. If the inflationrise, theeffective interestratewilldecline.Thecentralbankwill increasethemarketinterestratetocorrectthiseffect.

MonetarypolicyTheprimarypurposeofthemonetarypolicyisthepursuitofpricestability.Thepurchasingpowerwillremainthesameifthepricesareremainaboutthesamelevel.Pricestabilityisimportantfortheproperlyuseofourfinancialsystem(ECB,2008).TheEuropeanCentralBankprovidesstabilitybykeepingtheinflationjustbelowthe 2%. Increasing the market interest rate makes it less attractive for families and companies to borrowmoney. The consequence will be that prices will rise more slowly and inflation remains just below 2%.Conversely,theECBmaycutinterestratestostimulatingtheeconomyandinflationwillgoup.TheDutchmarketinterestrateswilllargelydependonthepolicyoftheEuropeanCentralBank.TheleveloftheDutchmarketinterestratewillfollowthemovesoftheEuropeaninterestrate.TheinterestisheldbytheECBdeliberatelylowfromthestartoftheeconomiccrisis.Thisistoensurethatdoesnotquitestoptheeconomyin

Figuur10-focushoofdstuk2.3

20

Europe. Low interest rates enables banks to borrow enough money and thereby provide enough loans tocompaniesorindividualsthatwillpromotethegrowthoftheeconomy.Adjusting interestrates isdoneafterananalysisofall thecentralbanksoftheEuropeanmemberstatesandthe European Central Bank. An economic and monetary analysis is done. De Nederlandsche Bank issues abiannualanalysisintheoverview;"OverzichtFinanciëlestabiliteit".InternationalcashflowsMajor international capital flows will affect the market interest rates. For example, if the companies fromEuropatradealotintheUnitedStates,thedemandfortheU.S.Dollarwillincreaseandtheinterestratewillgoup(ABNAMRO,2012).TransparencyThe amount of information that is shared from the issuer and themarket is essential for the confidence ofinvestors and in the market. Financial markets and products have become increasingly transparent so theinsidershavenolongeraninformationadvantage.Becauseall informationisavailabletoanyonetheinterestratescreateamorerealisticpictureandnewinformationis immediatelyreflectedinachangeintheinterestrateposition.ExpectationTostimulatetheeconomyandprovideahigherinflationrate,theEuropeanCentralBankhaveinvestedmorethan€60billiondollar intheeconomyoftheEurozone.Pricestabilityrequiresan inflationrateof justbelowbutcloseto2%(Praet,2016).TheDutcheconomywillgrowby2.1%inthecomingyear(CPB,December2015)andmostsectorsoftheindustrywillshow(slight)growthinthenextfouryears(ABNAMRO,December2015).The main risk is the domestic economy abroad where large uncertainties are, the falling oil price and thedecliningChineseeconomy.Theexpectationisthatitwillhaveanegativeeffectontheglobaleconomy.ThiswillmeanthattheECBwilladjustitspolicy.Theactionsarenotknownatthetimeofwritingbutitisexpectedthat the capital market will remain low in the coming quarters. The main refinancing rate (Refi rate) isdeterminedby theECBandthis is therateatwhichbankscanborrowmoney fromthecentralbankbackedwith securities (Encyclopedia ThiemeMeulenhoff). The refi rate will remain stabbing expected at 0.05% tofourth quarter of 2017 and the deposit ratewill decrease by -0.40% -0.50% in early 2016 to late 2017. Theexpectationisthatmostbankstheywillagainlowerthedepositrate.Duetothelowlevelofinterestrateswillbe thenext fewyearsareattractive to investmoney inbonds.Thetrendwillbe thatmore investmoneybybuyingbonds.Duetothefactofahistoricallowmarketinterestrate,thebondscanbeissuedwitharelativelowcouponrate.

21

2.4 LawsandregulationIt is obligated by law to write the prospectus in thelanguage of the country you will submit the bond. Theissuerofthebondmustactinaccordancewiththelawofthe countrywhere the product is submitted, in this casethe Dutch law. The most important principle is that aprospectusmustbecomplete,consistentandclear(AFM,2015).Thissectiondescribesthelawsandtaxregulations.ProspectusTheemissionofacorporatebondmustbeaccompaniedwithaprospectusapprovedbytheAutoriteitFinanciëleMarkten.However,anapprovedprospectusisnotnecessaryif(RICHTLIJN2003/71/EGVANHETEUROPEESPARLEMENTENDERAAD,2013):

• Anemissionofsecuritiesexclusivelytoqualifiedinvestorsor;• Anemissionofsecuritiestolessthan150naturalorlegalpersonspermemberoftheEUotherthan

qualifiedinvestorsor• Anofferofsecuritiesaddressedtoinvestorswhoacquiresecuritiesforeachseparateofferforatotal

considerationofatleastEUR50000perinvestoror• AnofferofsecuritieswhosedenominationperunitofatleastEUR50000or;• anofferofsecuritieswithatotalconsiderationoflessthanEUR100000,whichlimitshallbe

calculatedoveratwelvemonthperiodor;• OfferingsecuritieswithatotalconsiderationoflessthanEUR2.5million.

Article 4 of the directive 2013/71 / EC of the European Parliament and the Council contains several otherexceptionstotheprospectus.Afterwritingtheprospectus,itwillbeexaminedwhetheritfallsunderoneoftheexemptions.Whenaprospectus isapprovedby theAFM, it isallowedtouse theprospectusalsoacross theEuropeanUnioninoneoftheMemberStatesoftheEuropeanUnion.Theonlyrestrictionisthattheprospectusshouldbetranslatedintothelanguageofthecountry.Theprospectusmustcontainallinformationnecessaryforthebuyertodeterminethevalueofthebond.TheAFMmonitorstheprospectusforcompleteness,consistency,andwhethertheprospectusisobvious.WhentheAFM has approved the prospectus, it does not mean that the bond will work exactly as promised in theprospectus. It isnota label thatguarantees thereliabilityof the issuer.Thebuyershouldalwaysgiveaownvalue judgmenttothebondabouttherateofreturn, thereliabilityoftheseller, thetermsofthebond,etc.Chapter II of theDirective2013/71 / ECof theEuropeanParliament contains all the characteristics that theAFM uses to monitor the completeness of the prospectus. These guidelines will be used to build up theprospectus.TheexemptionTheDutchlawobligateissuersoffinancialproductstoputafinancialleafletonalltheadvertisementsforthefinancialproduct.Theleafletconsistsofaindicatorfortheriskofthefinancialproduct.Theregulationabouttheleafletcanbefoundinthelegislation“NadereregelinggedragstoezichtfinanciëleproductenWft”.If the exemption frompublishing an approvedprospectus is used it is obligated topublish this on the frontpage of the prospectus. This is obligated to protect the investor and make a clear distinction between anapprovedprospectusbytheAFMentheprospectusthatisnotapproved:

Figuur11-focushoofdstuk2.4

22

IftheproductsWanneerdeuitgevendeinstellinggebruiktmaaktvandevrijstellingvanprospectusplichtmoetditvermeldworden.DezemaatregelheeftdeAFMingevoerdomdebeleggerbetertebeschermenenzodatergeenverwarringkanontstaanomtrentgoedkeuringvanhetprospectusdoordeAFM:

Figuur12-verplichtevermeldingvrijstellingAFM

2.4.1 FiscalissuesWanneerdeobligatiehoudereennatuurlijkpersoonbetreftdanmoethetinkomstenbelastingbetalenoverhetrendement dat behaald wordt op obligatielening. In Nederland is het inkomen in drie soorten belastbaarinkomenverdeelddieboxengenoemdworden:

Box1:Ditishetbelastbaarinkomenuitwerkenwoning.Metinkomenuitwerkwordtloon,uitkering,pensioen, winst uit onderneming, fooien en andere inkomsten en inkomsten uit overigewerkzaamhedenbedoeld.

Box 2: Inkomen uit een aanmerkelijk belang in een vennootschap of coöperatie. Een aanmerkelijkbelanggeldtwanneermen5%,directof indirect,heeftvandeaandelen,winstbewijzenen/ofdegenotsrechtenvanaandelen/winstbewijzenineenbinnenlandseofbuitenlandsevennootschapofhetstemrechtheeftcoöperatieofverenigingopcoöperatievegrondslag.

Box3:inkomenuitsparenofbeleggen.

Box1:Ermoetbelastingwordenbetaaldinbox1voordeobligatiealsdeobligatiehoudereeneenmanszaakheeftofparticipeert ineenmaatschapofvennootschaponderfirma.Ermoetbelastingwordenbetaaldoverderentedieverkregenwordtuitdeobligatielening.Daarnaastmoetinbox1belastingbetaaldwordenoverdeeventuelewinstbijdeverkoopvandeobligatie.Dewinstwordtbepaalddoorhet aankoopbedragminushet verkoopbedrag vandeobligatie.Bij verliesopdeobligatiemaghetverliesalsaftrekpostgebruiktwordeninbox1.Schijf Belastbaarinkomen Percentage

<65jaar1 t/m€19.822 36,5%2 €19.823t/m€33.589 42%3 €33.590t/m€57.585 42%4 vanaf€57.586 52%Tabel6-Belastingtarievenbox1persoonjongerdan65jaar

Schijf Belastbaarinkomen Percentage>65jaar

1 t/m€19.822 18,60%2 €19.823t/m€33.589 24,10%3 €33.590t/m€57.585 42%4 vanaf€57.586 52%Tabel7-Belastingtarievenbox1persoongeborenin1946ofvoor01-11-1949

Schijf Belastbaarinkomen Percentage>65jaar

1 t/m€19.822 18,60%2 €19.823t/m€33.857 24,10%3 €33.858t/m€57.585 42%4 vanaf€57.586 52%Tabel8-Belastingtarievenbox1persoongeborenvoor01-01-1946

23

Box2:

Obligatieszijnschuldenenerisgeensprakevaneenaanmerkelijkbelangineenbedrijf.Inbox2hoeftdaaromookgeenbelastingtewordenbetaaldvooreenobligatielening.Box3:Ermoetbelastingwordenbetaaldinbox3overdewaardevanbezittingminusdeschuldenmetalspeildatum1januarivanhetdesbetreffendejaar.Dewaardevandeobligatiemoetwordenmeegenomenindeberekeningvandewaardevandebezittingen.Erbestaateenalgemenevrijstellingvoordewaardevanbezittingenminusdeschuldenvan€21.139.Erhoeftdusgeenbelastingtewordenbetaaldalsdebezettingenminusdeschuldenbenedenditbedragblijft.Ophetmomentdatersprakeisvaneenfiscalepartnerdanwordtdevrijstellingvan€21.139verdubbeld.VoorouderenbovendeAOWleeftijdvanopditmoment65jaargeldtdatzebijeenwaardevandebezittingminusdeschuldendielagerisdan€279.708rechthebbenopeenouderentoeslag.Dezeouderentoeslaghangtafvanhetinkomenuitbox1:Inkomenbox1 Ouderentoeslagbox3 Algemene

vrijstellingTotaalvrijstelling

<€14.430 €28.236 €21.139 €49.375€14.431-€20074 €14.118 €21.139 €35257>€20075 €0 €21.139 €21.139Tabel9-Ouderentoeslagbox3personenboven65jaarWanneerdehouderdeobligatieschenktaananderofkomtteoverlijdendanmoetdeanderbelastingoverdezeschenkingbetalen.Voorerfofschenkbelastingbestaanverschillendetarievenafhankelijkvanderelatiedieumetdeanderheeftenhetbedragdatmetdeschenkinggemoeidis.Erisvooriedereeneenvrijstellingoverdeeerste€2.111vanhetbedragenvoorandererelatiesgeldendevolgendevrijstellingen:

Relatieerfgenaam VrijstellingsbedragPartner €633.014Kindofkleinkind €20.047Kindmethandicap €60.138Ouder €47.477Anders €2.111Tabel10-Vrijstellingsbedragerf-enschenkbelasting

24

2.5 RateofreturnThe rate of return is one of the decission criteria for the investor to buy the corporate bond. The investorrequires a rate of return, which is proportionate to the risk. The yield is determined by the coupon rate,redemption and additional bonus. The return is the sumof the cash flows divided by the years tomaturity(Brealey,Stuart&Franklin,2010):

𝑅𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 = 𝐶!!

!!!𝑛

𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 ×100%

Parameters: 𝐶! = 𝑐𝑎𝑠ℎ𝑓𝑙𝑜𝑤 𝑖𝑛 𝑦𝑒𝑎𝑟 𝑡 𝑛 = 𝑡𝑜𝑡𝑎𝑙 𝑦𝑒𝑎𝑟𝑠 𝑡𝑜 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦The present value is used tomake a corretion for time the investors do not have acces to themoney. Theformulacalculatesthevalueoftheallethepaymentsofthebondatthepresenttime.Thepresentvaluecanbeusedtocomparedifferentbondswithdifferenttimetomaturity.Thepresentvaluecanbecalculatedwiththeformula:(Brealey,Stuart&Franklin,2010):

𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 = 𝐶!

(1 + 𝑖 )!

!

!!!

Parameters: 𝐶! = 𝑐𝑎𝑠ℎ𝑓𝑙𝑜𝑤 𝑦𝑒𝑎𝑟 𝑡 𝑡 = 𝑦𝑒𝑎𝑟 𝑖 = 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑓𝑎𝑐𝑡𝑜𝑟Ifthebondcanbetradedontheexchangemarketthereisathirdfactorfortheyieldbesidethecouponrateandtheredemptions.Theyieldisalsoinfluencedbythechangeinpriceofthebond.Therateofreturncanbecalculatedwiththeyieldtomaturity(Hull,2011).Themethodcalculatetheyieldtomaturityofthebondbasedonthecurrentrate,theinterestrateandtherepaymentdiscountedwithafixedfactor:

𝑃𝑟𝑖𝑐𝑒 = 𝐹

[1 + 𝜆 𝑚 ]!+

𝐶 𝑚[1 + 𝜆 𝑚 ]!

!

!!!

Parameters: 𝐹 = 𝑓𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒

𝑚 = 𝑐𝑜𝑢𝑝𝑜𝑛 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑛 = 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 𝐶 = 𝑐𝑎𝑠ℎ𝑓𝑙𝑜𝑤𝑠 𝑃 = 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑏𝑜𝑛𝑑 𝜆 = 𝑦𝑖𝑒𝑙𝑑 𝑡𝑜 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦

25

Thedurationistheusedtomeasuretheinterestratesensitivityofthebond.Durationisthefirstderivativeofthe price of the bond and the market interest rate. The price of the bond will depend on the maturity,redemption,thecouponpaymentsandthemarketinterestrate.Theformulafortheduration(Kat,2001):

𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 = 𝑡× 𝐶!

(1 + 𝑖!)!!!!!

𝐶!(1 + 𝑖!)!

!!!!

Parameters: 𝐷 = 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 𝐶 = 𝑐𝑎𝑠ℎ𝑓𝑙𝑜𝑤 𝑖 = 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 𝑡 = 𝑡𝑖𝑚𝑒 𝑛 = 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦Iftwobondshavethesametimetomaturity,thebondwithlowestdurationconsistsoftheleastrisk.

26

3. FrameworkbondThischapterisconfidential.

4. IntroductionissuerThischapterisconfidential.

5. DesigningthebondThischapterincludesteconditionsofthebondandthecreationofthecreditratingmodel.Thischapterishoweverconfidential.

27

6. Conclusion `How to design a framework that can used to issuing non-listed corporate bonds and

how can the framework be used to create a corporate bond for the client to attract additional capital from the market`

Theknowledgebasechapterisstartedwithidentifyingwhichfactorsinfluencetherateofreturn:termsofthebonds,thedevelopmentofthemarket,thelawsandregulationsandtherisks.Acreditratingmodelisbuildtodeterminetheriskofthecompanyandthebond.IhavedevelopedanExcelfiletocalculateallthetermsofthebond,thecouponpaymentsandtheredemption.TheExceltoolcanbeusedtodesigncorporatebondsinthefutureinafastandeffectiveway.Thecorporatebond:The most commonly bonds are the subordinated bond, the zero-coupon bond, de convertible bond, thecallable bond and the covered bond. For the private equity firm is a bond designed that is a combinationbetween thesubordinatedbondan thecallablebond.Thebondcanbe labelledasahigh-yieldbondand tomakethebondmoreattractiveforinvestorsanadditionalbonuswillbepaidatmaturity.

Confidential

Confidential

28

Themarketinterestrate:Themarketinterestrateisanimportantfactorifyouwanttoissueafinancialproduct.Themarketinterestrateis influencedbythemonetarypolicyandthethreeeconomical fundamentals;supplyanddemandofmoney,the national savings and the inflation. The market interest rate and the price of a bond have a negativecorrelation.Thepriceofthebondwillincreaseifthemarketinterestratewilldropandtheotherwayaround.Itisexpectedthatthemarketinterestratewillnotincreasemuchinthecomingtoyears.Themarketinterestratewillnotbeabovethe0,5%.Investinginbondsisthereforattractiveforinvestors.Thedemandforbondswillincreaseinthecomingyears.Therisk:Risk management is since the economic crisis a much-debated subject. Banks and companies create riskdepartmentstoguardagainsttherisksandaneweconomiccrisis.Thisthesisconsistofananalysisofall therisksofcorporatebonds.Itisnotpossibletouseafixedformulatocalculatetheriskandthecouponrate.Acreditratingmodelisbuilttoapproachthecreditratingofthebondandtoidentifyallthedifferentrisks.Ihaveconductedinterviewswithcreditratingagenciesandcreditplatformstogetanideahowtobuildsuchamodel.Theoverallconclusionisthatthemaincomponentsofthemodelaretheprofitability(rateofreturnoncapital), thesolvencyandtheliquidity.Theothercomponentsofthemodelare:

Confidential

29

7. Recommondations

Thischapterisconfidential

30

8. BibliografieABNAMRO.(2012).Rentemanagement.

ABNAMRO.(2016).Bedrijfsleven2016-2017:aanhoudendegroei.Risico'sliggenvoornamelijkoverdegrens,

digitaletransformatieisgroteuitdaging.

AutoriteitFinaciëleMarkten(AFM).(sd).Prospectustoezicht.Opgeroepenop2015;2016,van

https://www.afm.nl/nl-nl/professionals/doelgroepen/effectenuitgevende-

ondernemingen/aanbieding-notering-effecten/cursus-goedkeuringsprocedure

AutoriteitFinanciëleMarkten(AFM).(sd).CursusGoedkeuringsprocedureProspectussenAFM.Opgeroepenop

2015;2016,vanhttp://cursusprospectus.afm.nl/prospectus/

Banz,R.W.(1981).Therelationshipbetweenreturnsandmarketvalueofcommonstocks.JournalofFinancial

Economics.

Brealey,S.&.(2010).PrinciplesofCorporateFinance.McGraw-HillEducationEurope.

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Fundingtree.(sd).Peer-To-PeerBusinessLending.Opgeroepenopjuli2015,van

https://www.fundingtree.co.uk/peer-to-peer-business-lending

Hevner,M.&.(2004).Designscienceininformationsystemsresearch.MISQuarterly,76-106.

Hull,J.C.(2011).Options,FuturesandOtherDerivatives.Pearson.

Hull,J.C.(2012).RiskManagementandFinancialInstitutions.WileyFinance.

Kat,H.M.(2001).Structuredequityderivatives.WileyFinance.

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challengesofimplementation.

NationaleFinancieringswijzer.(2015).Financieringswijzer.Opgeroepenop2015,van

https://www.nationalefinancieringswijzer.nl/

NationaleFinancieringswijzer.(2015).https://www.nationalefinancieringswijzer.nl/financieringsvormen.

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https://www.nvb.nl/thema-s/ondernemen-financieren/170/financiering-van-het-bedrijfsleven.html

Ondernemersplein.(sd).Crowdfunding.Opgeroepenopjuli2015,van

http://www.ondernemersplein.nl/ondernemen/geldzaken/hoe-komt-u-aan-geld-voor-uw-

onderneming/

Rabobank.(2015).Beleggerswoordenboek.

Rabobank.(2015).Kwartaalberichtwoningmarktnovember2015.OpgehaaldvanRabobank:

https://www.rabobank.nl/bedrijven/cijfers-en-trends/

31

Rabobank.(2016).CijfersenTrends:Aannemersbedrijvengrond-,water-enwegenbouw.Opgehaaldvan

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U.S.SecuritiesandExchangeCommission.(2014).WhatareCorporateBonds.

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Vriesendorp.(2015).Herrijkingfaillisementsrechtenhetinformeelakkoord.

32

AppendixI:ProspectusThisappendixconsisttheprospectusofthebondandisconfidential.