Apart from the often talked about stockholders, bondholders often make up for a large section of a company’s overall investors.
While shareholders hold a direct stake in the company and retain its ownership, corporate bondholders have a different relationship with the firm. Bondholders lend a certain amount of money to the company issuing the bond, these bondholders hold no ownership in the company and instead expect to receive an agreed upon interest rate or yield.
Bondholders expect to receive regular coupon payments and their principal back at the end of the term.
Apart from holding this major distinction, bondholders have other rights over a company that helps them secure their investment even without an ownership stake.
If you are a bondholder or plan to be one, it is important that you know of the general list of items regarding what are bondholder rights and how they are applied in specific instances.
This is useful in order to keep track of the investment’s success, and to ensure how viable it is in terms of paying back the bondholders according to their agreement. It also helps bondholders keep track of any company decisions that favor stockholders or other investors over them.
For instance, since stockholders have the right to vote in key company decisions and bondholders do not, the former might make decisions that goes against the interests of the latter. Examples of such instances include but are not limited to any decisions that lead to decreasing the payout for the bondholders or depreciating the value of the issued bond. Being vigilant of the company’s finances helps bondholders in making sure that their interests are secure.
This is also especially crucial around the bond’s maturity date, which is when the company typically repays the principal to the bondholders. They could make sure that the company is in a good enough financial standing to pay off the bond in time. It also helps them manage “Call risk”, which is when a company gets the ability to buy back the bond before its maturity date.
There are a variety of agencies from the SEC to FINRA that regulate bonds in some form or fashion. As such, corporations may issues bonds as long as they comply with the current regulations.
Keeping financial information on hand allows bondholders rights to be managed optimally. It ensures that the company isn’t going down the path of bankruptcy. But if that happens, bondholders have another edge over other investors.
When a company goes under bankruptcy, it has to dissolve its assets and use the liquidity to buy its creditors first. As the foremost creditors, bondholders are often first in line when a company has to repay its debts.
This is often the reason why most investors actually go after bonds, since it potentially saves their funds from going down the drain. Even if a company fails and goes bankrupt, bondholders rights could ensure that these investors can get repaid accordingly.
In some cases, the principal amount might not be repaid in full. But it is still a better route for bondholders than seeing their whole investment amount disappear. This creates a safety net for bondholders and lets them cut their losses short in even worst case scenarios.
Given these reasons, this is also one of the first clauses covered during a bond agreement, which is also called an indenture. Any potential bondholder has to ensure that they are including this standard point into their indenture so that they are not left stranded if the company goes under.
But at the same time, the bondholders rights are largely dependent on the indenture that they sign. This document outlines their rights against interest rates, principal payments, and any indication of risks that they might have to be wary of in the future.
This indenture also identifies where their investment stands as compared to other creditors of a company.
For instance, any first mortgage bonds would always take precedent to any subordinate debt, and would be the first in line to be compensated in the event of a company’s bankruptcy. This means that if you are a bondholder buying into subordinate debt, then your investment and eventual payout may not always be prioritized.
As such, remember that while bondholder rights are defined on a larger scale, the devil is in the details. To understand more about what bondholder rights are to each specific agreement, remember to pay special attention to the details.
Bondholders Have the Right to Review the Company’s Finances
While widely known, it is essential to mention that bondholder rights include the ability to review the company’s finances due to their investment in it.Governmental Agencies Involved
For companies that have sold their bonds in public offerings, bond-focused mutual funds and exchange-traded funds (ETFs), it is mandatory to file regular periodic reports with the U.S. Security and Exchange Commission (SEC). This information is publicly available and could be reviewed by the bondholders at any time.Bondholders Hold First Rights to Asset Distribution
As bondholders have no ownership in the respective company, any decision that requires voting rights is only reserved to stockholders. But bondholder rights hold one major advantage over stockholders.Bondholders Need to Manage Their Rights Carefully At the Time of Signing the Indenture
The overall mechanism of buying a bond at face value and profiting through it via interest rates or yields is common knowledge. It is something that is essential to every corporate bond. In fact, it makes up for the very nature of such a bond.Why is this Relevant to Cryptocurrency Investors?
As the cryptocurrency industry matures, more investment products will come to the market. As investors look at these products and make capital allocation decisions, it is important that they understand the traditional processes and ask the right questions to ensure capital preservation.Disclaimer
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