Costs of corporate bond issue in coal mining companies

Agata Sierpińska-Sawicz , Patrycja Bąk

Abstract

In Poland, more than 90% of electricity production is based on coal fuel. Meanwhile, the financial situation of the mining industry is quite challenging. Companies in this sector are in debt, generating losses caused by a sharp drop in coal prices and a simultaneous increase in extraction costs that result from descending into lower levels of coal deposits. At the same time, banks are reluctant to loan money because of the risk of a borrowing entity's default. Increasingly, companies are turning to bond issue to maintain their liquidity and finance development projects. However, bondholders impose conditions in the form of covenants that are often difficult to satisfy, and the strictest relate to the level of a company's indebtedness and ability-to-repay-debt financial ratios. This article discusses bond issue costs. The authors analyze the bond issue programs of three of the four mining companies operating in Poland. The fourth company did not issue any bonds. Bond issue costs are composed of interest payable to investors, issue preparation and support costs, collateralization costs, and the cost of recording and organizing the sale. The main cost involved in bond issuance is the coupon cost, which depends on the company's financial health and its level of indebtedness, the purpose of the issue, its volume, and the type and quality of the safeguards against the risk of loss of funds invested by bondholders. Bonds issued by coal mining companies are assumed mainly by banks, which demand high interest due to the poor financial condition of the issuers. In addition to interest, companies also pay a capital commitment fee, an arrangement fee and a fee for early redemption. Altogether, in relation to the costs of capital raised through a bank loan, the bond issue results in significantly higher costs of raising capital.
Author Agata Sierpińska-Sawicz (WZ / KCAFiW)
Agata Sierpińska-Sawicz,,
- KCAFiW
, Patrycja Bąk - AGH University of Science and Technology (AGH)
Patrycja Bąk,,
-
Journal seriesContemporary Economics, ISSN 2084-0845, e-ISSN 2300-8814, [1897-9254], (B 15 pkt)
Issue year2016
Vol10
No2
Pages99-112
Publication size in sheets0.65
Keywords in Englishlevel of issue, bond rates, cost of bonds, collateral
ASJC Classification2000 General Economics, Econometrics and Finance
DOIDOI:10.5709/ce.1897-9254.202
URL http://www.ce.vizja.pl/en/issues/volume/10/issue/2#art437
Languageen angielski
Score (nominal)15
Score sourcejournalList
ScoreMinisterial score = 15.0, 10-01-2020, ArticleFromJournal
Ministerial score (2013-2016) = 15.0, 10-01-2020, ArticleFromJournal
Publication indicators WoS Citations = 9; Scopus SNIP (Source Normalised Impact per Paper): 2016 = 0.453
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