There has been a fair amount of debate in the market over the “SIB” term, as some argue that SIBs are not, in fact, bonds, and that the terminology confuses some market participants and observers. As last week’s White House convening made clear, however, the SIB term has gained general acceptance for the moment.
In fact, it is reasonable to consider SIBs a bond-like instrument. Investopedia defines bond as “a debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate.” This definition, of course, is the root of the angst, because SIB interest rates depend upon the performance of the project, and thus are not fixed.
Further investigation, though, indicates that the term “bond” actually covers a wide variety of instruments with lots of different bells and whistles. Convertible bonds can be converted into equity, so share many characteristics of equity. Zero coupon bonds make no coupon payments, but instead are issued at a discount to par value. High-yield bonds are issued by entities that do not qualify for investment-grade ratings by the leading credit agencies; they carry a higher risk of default and correspondingly higher interest rates than other bonds.
Thus there really is no such thing as a “typical” bond. SIBs share features of both debt and equity, like convertible bonds; and investors bear a higher risk of losing their principal, like high-yield bonds. So is a SIB a bond? Close enough, anyway – and it seems to be the generally accepted terminology at present.
Entry by Jane Hughes, Director of Knowledge Management