"Bond Planes" Keep Crashing: Why Czech Investors Are Losing Money on Corporate Bonds

Czechia continues to see a string of bankruptcies among companies that sold corporate bonds to private investors through unregulated channels — door-to-door, over the phone, or via hired agents. The latest high-profile case is Preston Capital, which has been declared insolvent, while the biggest collapse of the first half of the year was YD Capital, until recently one of the most active players on the Czech bond market.

According to an analysis by experts working alongside the Capital Market Association, between 2012 and mid-last year the Czech National Bank (ČNB) approved nearly 2,000 bond issues worth a combined 538 billion crowns. It turns out that more than half of the issuers — 1,138 out of nearly two thousand — chose an unregulated sales method, bypassing banks and licensed securities market participants. In monetary terms, that accounts for a fifth of the market — 101 billion crowns.

It is precisely this "unregulated" fifth of the market that, according to insolvency register data, turned out to be 12 times riskier than the regulated segment. Among bonds sold without the involvement of banks or brokers, 25% of the total volume ended up in bankruptcy, compared to just 2% among regulated issues. For comparison, at the start of the year the gap was sevenfold (14% versus 2%), but new bankruptcies have sharply worsened the statistics since then.

The unregulated bond-selling scheme resembles door-to-door sales: a company markets its own securities through hired agents, telemarketers, or street vendors. In the process, no one checks whether the promised returns match the actual risks, no one evaluates the issuer's business plan, and no one verifies whether such an investment is suitable for a particular person. Formal approval of the issue prospectus by the Czech National Bank creates a false sense of security: the regulator only checks that the document is complete, not the quality of the business or the company's ability to repay its debts.

The problem is especially pressing given Czechs' growing interest in investing. According to a recent Ipsos survey, 82% of Czechs now invest their savings, up from 66% a year earlier. 55% of people invest actively, compared to 41% two years ago. However, this still-nascent investing habit is highly vulnerable: bonds are traditionally seen as a conservative instrument, and newcomers often believe that, at worst, they simply won't earn a profit but will definitely get their invested amount back. That isn't true — and once burned, people often lose trust in investing altogether, moving their money back into an ordinary savings account, where it does nothing for the economy.

The proposed solution is straightforward: allow corporate bonds to be sold to the general public only through licensed securities market participants and banks, who bear responsibility for who they sell to and how. Small issues aimed at professional investors or an issuer's close circle could remain unregulated, since they pose no threat to the wider public. It has also been proposed to ban paper bonds altogether, leaving only electronic (book-entry) form, and to tighten transparency requirements for issuers with real sanctions for violations. Experts dismiss the argument that regulation would make financing more expensive for small businesses: unregulated distribution, due to high marketing and commission costs, already costs almost one and a half times more than the regulated kind.

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Source: seznamzpravy.cz