More and more companies are turning to the bond markets to raise finance. At the end of last year, the amount outstanding in corporate bonds worldwide reached a record $9,300bn (£6,400bn). In Europe last year, the market grew by nearly 10 per cent.

In the current environment, equity markets are not as viable a source of capital for many sectors as they once were. However, bond markets are being widely used, and the list of companies seeking debt financing is growing.

In the UK, the transport and water sectors expect to meet nearly all their heavy funding requirements in the bond markets. In Europe, utilities are among the biggest users of the bond markets, using debt to finance acquisitions. The telecommunications sector continues to seek debt to refinance maturing bonds and US companies, which had relied on the short-term commercial paper market, are increasingly issuing long-dated bonds instead.

This reliance on debt financing has given investors who buy bonds a more prominent role in the financial markets. Pension fund managers are also looking to the bond markets - the most notable example being Boots, the UK retail pharmaceutical chain.

While companies increasingly rely on debt raised in the capital markets for financing, the amount they pay for this debt can vary enormously. A fraction of a percentage point in extra interest costs can shave millions off a company's profits.

Many big holders of debt say their perception of a company's management and its commitment to meeting bondholder requirements are important criteria when buying bonds.

"The companies which are able to borrow at the lowest costs can usually do so because their management has a lot of credibility," said Bernard Hunter, head of fixed income at Merrill Lynch Investment Managers.

"Companies can say they want to look after bondholders, but if they have taken action in the past which has damaged bond investors, their promises will not be credible and this will be reflected in the price."

A company's credit rating - an assessment of the likely probability of default - is another key factor contributing to the cost of borrowing. This is assigned by rating agencies such as Fitch, Moody's Investors Service and Standard & Poor's.

A company with low leverage and high income is less likely to default than one with high levels of debt and low income. Most debt is issued by companies with investment-grade ratings, which are regarded as less risky than their non-investment grade or junk cousins. But within the various ratings categories there is a wide band of interest paid by companies on their bonds.

"The yields paid on corporate bonds vary widely these days, and it is almost impossible to guess a company's rating when you look at the interest it pays on its bonds," said Gary Jenkins, head of global credit strategy at Barclays Capital.

Bond investors have different needs to shareholders, who generally want growth to fuel increases in a company's value.

Bond investors, on the other hand, are mainly concerned that the debt is repaid on time. They also want to avoid any deterioration in the credit-worthiness of a company, which would cause a sharp drop in the prices on the debt they hold.

"We would like, as bondholders, to have a stakeholder status in the company and to develop a long-term relationship with borrowers," said Karl Bergqwist, head of credit investment process at Barclays Capital.

"The practical implications are that if borrowers have treated bondholders fairly in the past, it is more likely that bondholders will be supportive in the future."

Mr Bergqwist says well-structured bonds can lower the funding costs of companies.

While bonds appear a more secure investment, bondholders face their own risks. Increases in financial risk by directly or indirectly gearing up to boost return on equity, or lowering financing costs by accessing new funding - through, for example, sale and leaseback or asset securitisation - act to subordinate existing creditors.

"The European corporate bond market is still very young and market standards are often poor," said Mr Bergqwist.

"We are fully committed to working with other investors, industry bodies and regulators to support the orderly development of European capital markets as well as systemic stability."

In the meantime, there are a few basic rules that bond investors say corporate borrowers should follow.

They require access to senior management, just as shareholders do. Some companies still do not return the calls of bond investors, for example, and only meet them when they are marketing a particular bond.

"In the UK water industry, there are companies that have just not treated bond investors seriously.

"Now these companies need bond finance, and they will realise the impact of their attitudes in the interest paid on their bonds," said a senior bond investor.

Investors also ask that they be informed of strategic changes.

"We recognise companies are run for shareholders, and that there are times when companies need to increase their leverage," said Mr Hunter. "As long as we understand the reasons behind the shifts in strategy, we will generally be supportive.

"At least we can then make an informed decision about whether to continue holding bonds or not."

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