Introduction

Corporate bonds represent a significant source of financing for companies across various industries. Investors often mistakenly believe that the amount a company can raise from the sale of corporate bonds is directly proportional to its assets under management (AUM). However, this is not entirely accurate. This article explores the relationship between corporate bond financing and AUM, shedding light on the factors that truly influence borrowing capacity.

Understanding Corporate Bonds

Corporate bonds are debt instruments issued by companies to raise capital from the public or institutional investors. These bonds are typically secured or unsecured, depending on the collateral backing them. Contrary to popular belief, the total AUM of a company does not directly determine the amount it can borrow through corporate bonds. Instead, lenders and investors focus on the company's underlying assets and its ability to generate income.

Assets Under Management vs. Beneficial Ownership

One of the key misconceptions is the confusion between assets under management (AUM) and assets beneficially owned by the company. AUM refers to the total value of assets for which an asset manager is responsible, but these assets are not owned by the asset manager itself. Therefore, these assets do not form a basis for borrowing. In contrast, lenders and investors examine the company's directly owned assets—those it beneficially controls—to determine an appropriate level of debt for financing purposes.

Factors Influencing Borrowing Capacity

The amount a company can borrow through the sale of corporate bonds is influenced by several critical factors:

Credit Rating: The company's credit rating, determined by credit rating agencies, significantly influences its borrowing capacity. Higher ratings lead to better borrowing terms and higher marketing appeal for potential investors. Industry and Business Model: The nature of the company's business and industry play a crucial role. Companies in stable and predictable industries might enjoy better borrowing terms compared to those in volatile markets. Liquidity of Assets: The liquidity of the company's assets is a key factor. For instance, a company with short-term US Treasury notes might be able to finance a higher debt-equity ratio (e.g., 80-90%), as these assets are highly liquid and easy to repay. Collateral and Securitization: Whether the bonds are secured or unsecured also affects borrowing capacity. Secured bonds are usually riskier but can be financed at higher amounts due to the presence of valuable collateral. Regulatory and Legal Environment: Local and national regulations impact the borrowing terms and conditions, especially for highly regulated industries such as banking and insurance.

Leveraging Assets Under Management

While AUM itself does not directly influence corporate bond financing, the company can find alternative ways to leverage its AUM to enhance its financial standing. For instance, the company can:

Generate Fees: By effectively managing and increasing the value of its AUM, the company can generate higher management fees, which in turn can be used to improve liquidity and creditworthiness. Investment in Revenue-Generating Assets: Strategic investments in revenue-generating assets can increase the company's overall value and creditworthiness, allowing for higher borrowing capacity. Apply for Short-Term Loans: Even if direct AUM cannot be used for borrowing, the company can use the funds generated from AUM to secure short-term loans that can be used to purchase assets or pay off other debts.

Conclusion

Corporate bond financing depends on a complex interplay of factors, including credit rating, industry, asset liquidity, and the regulatory environment. While assets under management can provide indirect benefits, they do not directly influence the borrowing capacity of a company. By understanding these factors and strategically leveraging its AUM, a company can optimize its financial position and maximize its borrowing potential.