I recently took part as a speaker at a conference on bonds for the SME sector. The atmosphere was excellent – you could feel a bit of that pioneer spirit around what Koykan is helping to build in Croatia’s corporate bond market.
Fear
There was a lot of talk about fear – both on the side of those issuing bonds, and those investing in them.
Investors usually have one core fear: Will I get my money back?
Issuers have two:
- Will I have enough cash to pay the coupons (interest)?
- Will I have enough cash to return the principal at maturity?
If an SME is not reasonably confident it can cover the interest, then bonds are probably not the right instrument for that business. But the real decision point for most SME owners comes when they start thinking about the principal repayment. That’s where the real anxiety lives.
We went through exactly that discussion at Koykan. We built business plans, thought hard about what happens after three years, and how we would handle the maturity of the bond. At one point, in a conversation with one of our large investors, we got a piece of advice that stayed with me:
“Don’t treat the repayment of the principal as the key driver of your business decisions. You and your team should focus on delivering what you promised. The rest will follow.”
Our first reaction internally was shock and disbelief, followed by the classic question: “What do you mean by that?”
The answer was actually simple (especially when it comes from someone who invests millions of euros every year): bonds can be refinanced. If the company keeps delivering and keeps its investors informed, there is a good chance that most existing bondholders will stay in for a second round, if the company decides to issue again.
So my message to those who are hesitating is this: if you have a clear vision, a solid business plan, a real need for capital, and a good product or service – consider issuing bonds. And most importantly, do everything you can to deliver on what you promised.
8% yearly interest, are you folks crazy?
Another recurring topic in the Q&A was the coupon rate.
“How can you issue a bond at 8%? Are you in weapons, oil, drugs, or something else that’s not exactly legal?”
The answer is in the numbers. With every euro of capital, the company needs to generate multiple euros of value.
In Koykan’s case, we currently have an EBITDA margin of around 18%, and we typically need about 18 to 24 months to pay back the invested capital in a single business unit (for us, that’s one restaurant location). From there, you can do the math yourself.
Bonds are not meant for “pure” research and development. They are a tool for scaling and multiplying every euro in a business model that already has a proven, profitable flywheel.
Power of many
Now imagine a company with a good product that goes to market and does what it promised. Along the way, it issues a bond and ends up with, say, 500 small bondholders. It keeps in touch with them, updates them occasionally on successes (and failures), and treats them as part of the story.
Let’s say that company is Koykan today. (I do need to communicate more often with our bondholders and shareholders – this is my public reminder and public promise. No pressure.)
Now imagine that, at some point, the company runs into serious trouble. This is not Koykan’s situation – but let’s take a hypothetical scenario: we somehow infringe on someone’s intellectual property and lose a big lawsuit. For clarity: our lawyer Nina keeps us on a very tight leash here, IP is her speciality, so we’re safe on that front. But still – let’s imagine we mess up.
A judgment comes in, and suddenly we’re missing 1M EUR. The cost didn’t come from normal operations, but from management mistakes or a combination of unlucky steps. At that moment, the business is at real risk.
Now think about which of these two scenarios you like better:
a) You go to a bank, ask for a loan, and hope for the best.
b) You go to your bondholders and shareholders, explain the situation transparently, and ask each of them – if they are able – to invest an additional 3k EUR in a new bond round or an equity raise.
Tell me which scenario has a higher chance of saving the company – and at the same time protecting the value for everyone involved.
Disclaimer: Don’t intentionally violate anyone’s IP rights. And as we like to say in another context: before use, read the instructions carefully, and for risks and side effects, ask your lawyer or advisor.
If you’re thinking about issuing your own SME bond and want to work through the logic, feel free to reach out — I’m here (and on LinkedIn).
Good luck.