HOW PUBLIC COMPANIES RAISE CAPITAL
BONDS SALES VERSUS STOCKS SALES
“Why would a corporation issue bonds instead of just borrowing from a bank or selling stock?”
Simple answer; bonds are a more attractive option for a public company to raise money, as well as for an investor, than selling stock, which will be further discussed below. Additionally, the money required by a Public Company, in most cases, may well exceed bank limits. Public finance therefore may well be their only option.
What are Bonds?
Bonds are corporate debts instruments whereby a Public company borrowers money direct from the public. These Bonds pay Interest and can be structured over a period of years, to suit the company.
A Public Company has the ability to borrow large sums of money through a bond raise, at relatively low interest rate. This allows a public corporation the ability to invest in growth, infrastructure and even to acquire other projects, through public debt. It also gives a company the freedom to operate as they see fit, including increasing capital reserves, because it releases them from the restrictions that are often written into bank loans, as well as problems inherent in ownership of the company itself through the acquisition of company stock.
Bond Sale Versus Stock Sale.
Selling stock, grants proportionate ownership in the company to investors in exchange for money. While this is a popular way for corporations to raise money. It’s most attractive feature being, the money generated from the sale of stock does not need to be repaid.
But, there are, downsides to stock issuance that may make bonds the more attractive proposal.
With bonds, a company can continue to issue new bonds, without first paying off a previous bond raise. The Bonds also have no effect on ownership of the company or how the company is managed or operates.
While the negatives of selling shares in a Public Company, will result in a dilution of the share value.
Stock issuance while it puts additional shares in circulation, requires that future earnings must be shared among a larger group of investors. This will result in decreased earnings per share (EPS), making each owner’s share worth less money.
By issuing debt securities, corporations are able to attract a large number of lenders in an efficient manner. The Record keeping obligation is simplified, all bondholders will get the exact same terms, including the interest rate and maturity date.
Companies also benefit from flexibility by a variety of bond offerings available to them. A Public company can offer bonds backed by assets. Bonds that give investors the right to claim the company’s underlying assets, in the event of a default, this type bond is known as “collateralized” debt. This underlying debt can be other bonds, real estate or any real asset class.
Another option, Convertible bonds. This type of bond starts off like other bonds but offers investors an opportunity to convert their holdings into a predetermined number of stock shares. such conversions enable investors to benefit from rising stock prices and give companies a loan they don’t have to repay.
For Public companies, the bond market offers several ways to borrow, while not diluting ownership in the company through the same of the company’s common, or preferred stock.