Midea’s story is just one of a series. In 2019, it issued and sold corporate bonds for 25 million crowns, ie close to the volume of the sub-limit issue, which counts to one million euros. The offer of eight percent bond appreciation attracted 133 investors. However, the company operating the online toy store Bejbynet.cz had overdue receivables in the amount of almost 68 million crowns, ended up in insolvency and the police became interested in the project.
From 2013 to the end of August this year, a total of twenty-two companies issued 0.43 billion crowns in the Czech Republic in the Czech Republic. “Cheated small savers, concerned financial and supervisory institutions, as well as the professional public. This boom in sub-threshold bonds and a huge number of inexperienced investors is a time bomb, ”warns the Survelligence study.
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What’s wrong? In 2012, the Czech National Bank (CNB), together with the Ministry of Finance, led by Miroslav Kalousek at the time, relaxed the conditions for the issue of bonds. Among other conditions, the obligation to have the CNB approve the issuance conditions for bonds with a total issued amount of up to EUR 1 million has lapsed.
The issuance of small sub-threshold corporate bond issues up to this amount has thus become an “absolutely unregulated, virtually unguarded and very risky part of the investment market,” according to the study. The companies sent bonds worth a total of 5.2 billion crowns to the market in small issues. “We noticed that for a number of sub-limit issues, the investor had no chance to verify anything, because the issuer did not publish anything except the prospectus,” describes Ján Lalka, Director of Surrveligence. He had in mind, for example, the missing financial statements in the collection of documents, which would show the financial condition of companies.
Obviously, small emissions are not very beneficial for companies. The companies that did them had not very often obtained other funding from banks before, which should have been a warning to investors. The cases examined showed that up to a third of the amounts obtained from the bond issue were not used for the investment plan, but for the administration of the issue in the first year. For example, to cover the costs of brokerage services to bond sellers and online marketplaces or rewards and betting commissions.
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Last year, the legislation on bonds tightened. Until then, companies did not even have to report below-limit emissions anywhere. Bonds must now be registered with the CNB and have their own ISIN number. However, according to the forensic agency Survelligence, they are still a very risky investment and regulation is very small. “If issuers want to issue a fraudulent issue, neither the perfect prospectus nor ISIN will protect investors,” says Ján Lalka. The so-called prospectus is approved by the CNB, but only formally.
According to the expert, the legislation should be amended to record the creation of a central register of all bonds, including sub-thresholds, the obligation to publish financial statements for the last accounting period before the issue or to allow sales only to regulated intermediaries with material responsibility.
Investments of 2021: Commodities, stocks, cryptocurrencies and bonds
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Investments of 2021: Commodities, stocks, cryptocurrencies and bonds • VIDEO Videohub
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This would not be the case, for example, with another of the warning cases of the Bond Eldorado in recent years. In 2018, the company ENTEF group s.r.o. from the group around the Czech Industrial Holding attracted 7.8 percent per annum on bonds from a small issue. But at the same time, she was already in liquidation.
In total, since 2013, companies have issued bonds worth almost 340 billion crowns in small and large issues, and bonds in excess of 4 billion crowns have proved to be dusty. Most of them are so-called large issues, but the risk for them is many times lower for investors than for small issues.
Companies that issued below-limit issues and found themselves in insolvency (in millions of crowns)
Zoot 21,9
Xenylla (in insolvency) 5.0
Wood Union 41,6
Weber EU (in bankruptcy) 16.0
Triload Invest (in competition) 24.0
Seventh Prague (in competition) 22.0
Remaind (in competition) 25.0
Regional Express 6,0
Regal Group 6,5
PM Pivovar 0,7
Nautic Solutions 24,3
Miia SE 10.0
Midea (in insolvency) 25.0
Maxi – Tip 24.0
Lipa Learning 28,4
Euro Development 25,0
ENTEF Group (in liquidation) 25.0
EMTC – Czech (in insolvency) 20.0
Data Safe Centrum 25,0
BGC Travel 24,0
BE 2025 3,0
Anilo Drinks (in insolvency) 25.0
Total 427.4
Source of Surveillance
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