Bonds and loans: two different financing models
Bonds and loans are financing instruments used at one moment or other by companies during the course of their existence. These are two conceptually different credit products that are sometimes confused. It is important to differentiate between both means of financing and understand their characteristics in order to know their true essence.
A bank loan is a financial operation in which a banking entity (lender), through a contract or agreement between the parties involved, grants a sum of money to a third party (borrower) in exchange for the payment of interest, known as the cost of money. A bond by contrast is defined as a debt instrument issued by a company or public administration and sold to investors in the financial markets with the aim of securing resources to fund itself. The issuer of the bond promises to return the money plus previously agreed interest payments (coupon) to the purchaser of the bond.
The two financing formats are not incompatible and can be complementary. However, it is important to distinguish between the two to really understand their meaning.
Main differences
- Who is asked for the money? Companies ask a bank for a bank loan. However, in the case of bonds, the company, also with the help of banking entities as placement agents, issue debt securities in the financial market which are acquired by investors.
- Does the payment schedule differ for the two formats? Bonds allow for longer payment periods while loans are usually of a shorter tenure.
- Are the two means of funding equally flexible? Loans are tailored according to the company’s interests and can change as the company evolves. They are flexible in terms of repayment ahead of schedule and the renegotiation of their conditions to the benefit of the borrower. This is not the case of bonds whose refinancing conditions are more complex and restricted.
These are the most important differences between the two products in a financial world in a constant state of flux and innovative evolution. This is evidenced by the unprecedented growth in green products and services that cover both loans and bonds. 2017 was an important year in the development and push of sustainable financing. Green bonds issues in volume terms beat all records with growth of 52% on a year earlier. Green loan disbursement was hardly a laggard registering previously unrecorded, although more gradual, growth levels.
BBVA, a leader in sustainable finance
BBVA has the capability, knowledge and experience to provide its customers with top-quality advice on sustainable finance solutions in both bonds and loans, and is playing a key role in developing both markets.
The bank has been the most active bookrunner in the green bond market in Iberia and is a global refernce for having advised, placed and structured green bonds for clients in different industries in Mexico, the US and Europe, both in local currencies, in euros and dollars.
In the green loans business, in which BBVA has been a pioneer and is a fundamental driving force, the bank closed 2017 as the most active entity worldwide, with a total of 11 operations in Europe and Latin America for clients from various sectors and is the undisputed leader in Spain.
BBVA has recently announced its Pledge 2025, the Bank’s climate change and sustainable development strategy designed to make progress in the achievement of the UN Sustainable Development Goals (SDGs) and the Paris Climate Agreement.