Proposing A Corporate Bond Market!

I’ve posted this thing on the discord, but I wanna leave it up here so it doesn’t get buried.

I was wondering whether it would be possible to implement a corporate bond market in the game. I personally think it’s feasible ot implement without any major changes to the game.

Corporate Bond Market Ads

A corporate bond market, as I would imagine would have a similar interface to the LM markets.

Each ad that goes up should require the bond issuer to list:

  • The number of ‘lots’ of 1000 credits each, which is the face value of the bond
  • The number of days till maturity, where the issuer of the bond pays the investor the face value
  • The interest rate the issuer is willing to pay, denoted in % or in credits to pay per period (coupons)
  • The how regularly the issuer is going to pay the interest. (how often coupons are paid)

For example:
ISSUING 5000 @3% for collection every 1 day(s), maturity in 10 days

Bond Contracts

If an ad is accepted, a contract is signed where the first line would be for the investor to fulfil the issuer’s bond, and then deadlines would be set for each interest payment.

For example, imagine the contract screen for a bond:

Index | Condition | Deadline | Party | Status | Depends on | Cmds

#1 | Payment of 5000 CIS | 1 day? | investor corp
#2 | Interest payment of 150 CIS | 1 day | issuer corp
#3 | Interest payment of 150 CIS | 2 days | issuer corp

#11 | Interest payment of 150 CIS | 10 days | issuer corp
#12 | Maturity payment of 5000 CIS | 11 days | issuer corp

Collateral and defaulting?

Right now the above system seems to be fairly straightforward to implement with no major changes to the game, but a system for the issuer to put up collateral would require other things to be changed. It could be placing certain goods as collateral in the contract and taking a ratings hit, but if the company isn’t gonna meet their debt obligations they probably wouldn’t willingly pass up their collateral.

Therefore, I think it’s fine for the lack of collateral to be manifest in higher interest rate payments for now until there is a different COLIQ system where things can be repoed.

I further suggested that a way to recoup some losses is for the defaulter to be charged some amount every time they use the CX. This would account for debt that is waiting on CX sells to be paid back. Aeryen noted that like warehouse fees that get deducted automatically, if you default the game could do the transfer automatically. We could also have a ‘partially fulfilled’ system, where the debtor pays what they have.

Twilight Sentinel proposed that a building can be put up for collateral, and automatically demolished if the debtor defaults.

The investor can always extend the contract, but if they do so they should not continue to accrue interest so as to prevent debtors from going into a debt spiral and COLIQing. I think any further concern on repoing would require an overhaul of the COLIQ system.

Credit Ratings

To my knowledge, corporate bonds are rated by credit-ratings agencies to evaluate their credit score. However, since this is a game we could let the players decide for themselves. Perhaps their creditworthiness can be calculated somehow and added as a 4th category under rating sub-scores?

The game already has a ratings system, but reliability =/= creditworthiness necessarily. A separate creditworthiness score could be implemented.

Furthermore, we could allow for the issuer to post a short blurb about what they will use the money for on the interface, if it would make it easier for creditors to evaluate for themselves which debts to finance. They can also always message each other about it in game.

Secondary Bond Market

To make implementation easier, if you want to sell a bond you already have you can just issue another bond instead of transferring ownership to a new player. The problem with this is that the investor who is selling the bond to the secondary bond buyer would take a ratings hit if they fail to meet their obligations.

Therefore, for a good secondary bonds market to emerge, if it’s feasible it would be nice if you can sell the rights to a particular bond for money. This would also allow the debtor to buy back their debt early. However, I’m not sure how this would be implemented.

Why implement this?

The reasons why I think a corporate bond market is important is:

Firstly for players to be able to take on debt to expand faster, in a way that is more secure than lm ads where players can escape their obligations without a ratings hit. Having a bond market in the first place would signal to players that it’s a thing that can be done at all. Besides that, a player can sell multiple bonds at once to many different people, without having to spend time searching for someone with the capital.

Having a centralised platform would make it easier for debt to be issued in the first place anyhow. If we didn’t have an FX market and FX transactions were done on LMs, there would probably be far less volume traded.

Next, is to prevent people from being forced to fire sale during a recession (which spreads economic instability to other players in the market, as they too are forced to fire sale). A player who is able to take on debt to meet their obligations could weather the short-term economic shock better, and wait for conditions to get better to repay their debt.

Addressing concerns

Will players fall into a debt spiral and COLIQ, taking the market down with them? (Dirac)

Naturally if you take on unsustainable debt you will suffer the consequences. Likewise, if you loan someone money whom you expect to default, you would either not loan the money or charge a higher interest rate. I think that players should know what they’re getting into when they enter the market, and some degree of risk is necessary at all to have fun.

Furthermore, I don’t think the debt has to be compounded, with my limited understanding of corporate bonds. (so take it with a pinch of salt!) I think that the coupon price should account for any compounded interest in the first place. If the debtor can’t meet their payments, I think coupon payments should stop when when the deadline is extended by the lender.

Can’t we use private contracts instead?

Yep, we can, when they are implemented. Ideally, private contracts should give more flexibility in how to structure debt (being paid back in commodities, perhaps?). However, although we can do Forex trades on the LM, we should still have a dedicated FX market.

having to login every day to pay coupons (Rain)

We could probably set coupon payments to automatic provision, just like shipping contracts.

would anyone even give loans? (Rain)

Rain suggested that the growth rate is about 1.5-2% a day. Therefore, no one would loan for less than 1% a day returns, which makes it hard for debtors to pay back their stuff.

Firstly, I personally that a 1.5% interest rate is feasible, since I’ve done it with a corp member before. It was only for less than a week though, and I can imagine that shorter-term debts with high creditworthiness will be loaned out at lower interest rates.

For longer/medium term debts, I still do think that some people will still be willing to lend. Although, this is just speculation on my part and we will only see people’s preferences when implemented. For example, someone saving up for a second base or large purchase might loan out some money while waiting for the rest to come in.

Yeah, so this is my proposal for a corporate bond market, let me know what you all think! Thanks for reading!

tl;dr we need a finance industry in this game

3 Likes

From Prosperous Universe Roadmap

sadly under “Future” not “Planned”

The problem is commitment + paying someone else to play the game for you.

Early players will not only COLIQ, they probably get into debt without knowing the game that well.
Late players will only buy your bonds if you do something they can’t do or do not want to do. They will pay your for putting bases on exotic places that aren’t worth your 5th base slot.

The latter can be implemented via 1 DW (or any dirt cheap consumable) contracts but for convenience we need the ability to pay in installments. So either we need repeating contracts or we need the ability to partially pay for a single contract.

Repeating contracts (e.g. sell 500 H2O/week) are useful even without loans so I would see those implemented as a precursor to a real bond market. The vast majority of bonds will be of the “I pay you to build a base that makes X, but you must sell me 100 X every week” type. This solves the “bad debt” problem because we won’t see players funding useless bases in the first place.

An interesting source of funds for these investments I could see would be government accounts. If government has money sitting in the bank they should do something with it to A, increase the flow of money around the economy, and B, make some profit for the benefit of the government and people. I could see a 1% interest rate or lower being feasible with that.