Bond Issue
this is where a company (the ‘issuer’) sells bonds (similar to IOUs) through the debt capital markets. Bonds are purchased by investors and entitle them to a periodic interest payment (coupon) in addition to a lump sum repayment of the principal amount after a set period (when the bond ‘matures’).
Pros:
- Control: bond issuers do not have to offer bond purchasers security over their assets (meaning issuers remain free to use their assets as they see fit) and bondholders generally do not place restrictions over subsequent business operations.
- Effectiveness: access to multiple investors through the capital markets makes it easier to raise large amounts.
Cons:
- Demand: if a company has a low credit rating or a low profile, there is no guarantee that all bonds will be sold if they issue them (or that banks will agree to underwrite the issue). This could prevent the company from securing all the capital they need. To stimulate demand, companies sometimes offer bonds with higher returns (known as ‘high yield’ or ‘junk’ bonds).
- Arranging Finance: bond issues are expensive to arrange, as many terms need to be set out. A bond issue is therefore unsuitable for companies raising only a small amount of capital.
Underwriters
Bond issues involve underwriters (investment banks) which typically agree (for a fee) to either purchase all the bonds in advance and subsequently sell them on to investors, or to purchase any unsold bonds post-issuance.
Prospectus
Legally required document that must precede bond or share issues. It advertises the issue to potential investors and contains information about the issuer’s business, the potential risks and the issuing firm’s financial circumstances in addition to the terms and conditions of the issue.
Share Issue
This is where a company sells (‘issues’) its shares. Investors provide money in exchange for shares that represent an ownership stake in a company, with the aim of reaping returns in the form of capital growth (if those shares are later sold at a profit) and dividends (if the company elects to pay dividends).
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By Jake Schogger - City Career Series