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What are Private Placement Bonds?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 06 December 2016
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    2003-2016
    Conjecture Corporation
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Private placement bonds are bond issues that are included in a non-public offering to a select group of investors. Typically, issuing bonds as part of a private offering requires compliance with governmental regulations that are similar to those used for public offerings, but differ in a few basic requirements. In many cases, the opportunity to purchase the private placement bonds will be limited to investors meeting specific qualifications put in place by the issuer.

In order to participate in an offering of private placement bonds, investors must normally meet certain minimums requirements as outlined by the issuer and any laws or regulations that apply in the jurisdiction in which the bonds are offered. At times, the offer may be limited to a specific sector of industrial investors or possibly a select group of private investors. The provisions found within the bond agreement will also vary, depending on how the issue is structured. Bonds of this type may mature in a short period of time, or take a number of years to reach full maturity.

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In addition, the rate of interest applied to private placement bonds may be variable with a specific base rate specified in the terms, or carry a fixed rate of interest. That interest may be paid to investors in accordance with a schedule throughout the life of the bond, or be settled in full once the issue reaches maturity. Depending on the structure of the bond issue, the issuer may also have the ability to call the bond early at specific points in the debt instrument’s life, a factor that investors should take into account before choosing the purchase the issue. Since callable bonds often allow the issuer to also convert the bonds into shares of stock, investors should consider that possibility along with other factors before following through with the purchase.

Private placement bonds are usually considered to be low-risk investments that are highly likely to generate some sort of return. When the interest rate associated with the bond is fixed and there is a low likelihood that the issue will be called early, an investor can project that return and have a good idea of how much profit will result from the investment. Even if the bond issue does carry a variable rate of interest, careful scrutiny of the projected movement of average interest rates within the economy will help investors to identify potential minimum and maximum returns over the life of the bonds, and be able to make an informed decision regarding the purchase of the bonds.

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