In 2020, the Andrew Kamanga led FAZ proposed a USD10 Million Chipolopolo bond and convinced the public.
Two years down the line, the story of the bond is no more.
Whatever happened to it, no ones knows.
Below is an article which was posted on their facebook page on July 21, 2021.
Following sustained questions around the proposed USD10 Million Chipolopolo bond, the FAZ Media Team provides an everything-you-need to know package about the financial instrument.
FAZ president Andrew Kamanga and his executive have embarked on the process of issuance of the Chipolopolo bond with the process in full flight.
The FAZ media team unravels the bond intricacies through the lenses of committee chairperson Katema Mutale.
Introduction
The Football Association of Zambia is the country’s football governing body mandated to manage and develop football, futsal, and beach soccer at all levels. In order to fulfil this mandate and also to make the club financially self-sustaining, FAZ is considering raising financing through the issuance of a corporate bond.
What is a bond?
A bond is an instrument that businesses, governments and other types of institutions use to borrow money from investors or the public.
It can be therefore regarded as a specific type of loan.When a company borrows money using a bond it is said to have issued (sold) a bond and is therefore called the Issuer.
The person that buys or invests in the bond is called the Bondholder
There are different types of bonds but in general they share the following characteristics:• They pay a fixed interest rate called a ‘Coupon’ usually on a semi-annual basis (twice a year).
• They are trade-able instruments meaning the bondholder can sell their bond to another investor on the secondary market (e.g. Lusaka Securities Exchange). This also means that investors can buy a bond from other investors or bondholders.
• The date on which the bond must be paid back (Maturity Date) is more than one year from the date that it was issued. This period is called the Term or Tenor of the bond.
• They are issued at a discount to their face value. This concept is best illustrated by an example.
If Company A issues a bond to pay back K100 (Face Value) in ten years, Investor B will pay K90 to Company A for that bond.
The K10 difference between the face value and what the investor pays is called the Discount.
The discount is considered as part of the return or ‘profit’ from buying the bond and its size will depend on prevailing interest rates.
How is a bond raised and how does it work?When issuing a bond, the issuer first prepares a document that gives information about its business and the proposed bond.
This document is used by investors to evaluate if the planned bond is a suitable investment for them.
This document is called an Information Memorandum.After getting the information memorandum approved by LUSE and SEC, the issuer distributes it to investors and invites them to make offers to buy the bond.
The bond issuance is regarded as successful if the offers submitted by investors reach the target amount that the issuer wanted to raise.
Who are the major financiers?Ideally anyone can participate in a bond offer if they have money to invest.
Institutional investors such as pension funds that manage large pools of funds are naturally the biggest investors in most bond issues.
Consequently, they are also a primary target for most bond issuers to help ensure that they raise their targeted amount of money in the offer.
How feasible is it for an institution like FAZ to raise $10 million and how will it be paid?Any institution is free to issue bonds to raise money to grow their business as long as they meet regulatory requirements and that there are investors in the market willing to buy their bonds.
Investors will use the information memorandum to assess the financial strength of the issuer and its ability to repay the bond.
The size of the bond that a company can issue will therefore depend on investor’s assessment of the risk of the bond as well as the money they have available to invest.
Issuers can therefore potentially raise large amounts of capital if they have an attractive proposal and there is liquidity in the market.
How much is the interest?The interest rate on a bond is usually determined by considering prevailing interest rates in the market and what investors are likely to ask for. Setting of the final interest is therefore usually done closer to when the bond is finally being first issued or sold.
What is the payment period?The bond issuer is free to decide the payback period or term of the bond.
When setting the period, they will try to arrive at a term that best suits their cashflows and will be acceptable to investors.
Is there collateral when raising the bond?Most bonds do not have collateral attached to them and investors primarily rely on the cash-flows of the business for the bond to be repaid.
Bondholders are secured in other ways including that they are able to resell their bond, the issuer can allocate certain revenue specifically to repaying the bond or it can create a sinking fund.
With a sinking fund, the issuer periodically saves money into a separate account which it uses to pay back the bond when it matures.However, some bonds like typical loans, are secured by pledging a specific asset as collateral to make the bond more attractive.
The bond can also be made more attractive to investors through the presence of a reputable underwriter in the bond issuance.
The underwriter assesses the risk of the bond and commits to buy a large part or all of the bond which can be seen as a show of confidence in the quality of the bond issue. This may however come at an additional cost to the issuer through underwriting fees.
How can one be a member of this bond….
How can one be a member of this bond..or an investor