In the wake of the coronavirus pandemic, companies have been enticing investors with promises of lucrative returns through corporate bonds, as small investors seek alternatives to low-interest savings accounts. However, the economic downturn has cast a shadow on many businesses, making bond repayments a daunting challenge.

Despite the prevailing difficulties, the trend of bond issues is on the upswing, with various sectors such as real estate agencies, auto services, and canning manufacturers entering the market. According to bond expert Jan Topinka from the Havel & Partners law firm, approximately 210 bond issues, amounting to 30 to 35 billion Czech korunas, are due for repayment next year. A concerning projection suggests that ten to twenty percent of these companies may encounter serious financial problems.

The underlying issue lies in the viability of many companies, operating with the influx of new capital primarily sought through bond issues. In July this year alone, companies issued bonds worth over four billion korunas, indicating a substantial year-on-year increase of 40%.

A significant portion of these bond issues, around 44%, offers yields ranging between eight and ten percent, with an additional 18% providing gains exceeding ten percent, primarily in smaller volumes. Analyst Vladimír Pikora from Comfort Finance Group notes that the market is bracing for a potential fall in interest rates, reflected in the shortening of the average maturity period from 3.81 years in June to 3.36 years.

A survey conducted by Ipsos for the Bondster platform, involving a thousand Czech investors, revealed that 16% of savers experienced losses on corporate bonds last year. Vladimir Bruna, head of B&K Real Estate Investment, issued a cautionary reminder that no investment, especially in corporate bonds, is entirely risk-free. The success of an asset can only be accurately assessed after the entire investment period, including the return of the principal.

While investing in corporate bonds holds the potential for profitability, it is imperative for investors to acknowledge and navigate the inherent risks. With the market anticipating a decline in interest rates, diversifying portfolios becomes crucial for ensuring optimal protection and valuation of investments amidst economic uncertainty.

Article by Prague Forum