Obtaining resources in the short term is a difficult task for companies, which is why debt issuance through bonds is sometimes a practical alternative in raising capital.
The bonds are certificates that are issued to obtain resources, these indicate that the company borrows a certain amount of money and agrees to repay it at a future date with a previously established amount of interest, and in a certain period.
General characteristics of the bonds:
When the company issues a bond issue, it must take into account the following aspects:
Conversion Features
This allows the creditor to convert the bonds into a number of common shares. The creditor converts your bond only if the market price of the share exceeds the conversion price. This feature is considered attractive by the issuer and the buyer of corporate bonds.
Purchase option
The call option is included in almost all bond issues, it gives the issuer the opportunity to redeem the bonds at a set price of their maturity. Sometimes the depreciation price varies over time, decreasing at different times defined in advance.
The redemption price is set above the face value of the bond to offer some compensation to the holders of the redeemable bonds before their maturity. Generally, the purchase option is advantageous for the issuer since it allows him to collect the current debt before its maturity. When interest rates fall, an issuer can request for redemption a current bond and make another issue of a new bond at a lower interest rate, therefore when interest rates rise, the privilege of amortization cannot be exercised, except to meet the requirements of the amortization fund.
To sell a redeemable bond, the issuer must pay an interest rate higher than that of non-redeemable equal risk issues. The call option is useful to force the conversion of convertible bonds when the conversion price of the security is below the market price.
Shopping coupons
The " warrants " or purchase coupons are part of the bonds as collateral, to make them more attractive to prospective buyers. A purchase coupon is a certificate that gives your holder the right to buy a certain number of common shares at a stipulated price.
For the future benefit:
Bond buyers are creditors who expect to receive specific periodic interest and principal repayment at maturity.
Marketing and sale
The main bond issues can be done in two ways, by direct placement or by public offerings.
Direct placement
Direct bond placement involves the sale of a bond issue directly to a buyer or to a group of buyers, usually large financial institutions such as life insurance companies or pension funds. Direct placement bond issues do not differ significantly from a long-term loan and have virtually no secondary market.
Since the bonds are placed directly with the buyers, there is no need to register the issue with the stock exchange commission. Directly placed bond interest rates are slightly higher than similar public issues because they avoid certain administrative and underwriting costs.
Public offerings
Bonds that are sold to the public are generally placed by investment banks that are in the business of selling corporate securities. The investing bank receives compensation for the service from the issuer and its commission is a percentage of the principal amount previously stipulated by the parties. Bonds that are issued in public offerings must be registered with the stock exchange commission.
The price at which these bonds are offered often differs from the established rate or the bond coupon, if other similar debt-risk instruments currently produce an interest rate higher than the bond coupon rate, it must sold at a discount, that is, below its nominal value, but if the rate is below the coupon rate of the bond, it is sold at a premium, that is, with a higher value than the nominal value.
When a bond is sold below its face value, it is said to have been issued at a discount, but if instead it is issued at a higher value, it is said to have been issued at a premium.
Bond Classes
Bonds can be classified according to whether or not they are guaranteed by the pledging of specific assets, this means that some issues are guaranteed and others are not.
Unsecured bonds
Unsecured bonds are issued without the pledge of any specific type of asset, so they represent a right to profits, but not their assets, there are two main types of unsecured bonds:
- Securities: Securities (Debentures) have rights to any part of the assets of the company once the claims of all secured creditors have been satisfied. Subordinated credits: These are credits that are specifically subordinated to other types of debt. They have the advantage that their claims must be satisfied before that of preferred and common shareholders.
Guaranteed bonds
There are several types of guaranteed bonds to obtain long-term funds, among the most common are:
- Mortgage bonds: It is the one that guarantees with a lien on real estate or buildings. Normally, the market value of the bond is greater than the amount of the mortgage bond issue. Collateral guarantee bonds: These are bonds that are issued with a guarantee from other companies, in these cases with the parent companies of the issuing companies. Generally the value of the collateral is greater than the value of the bonds. Income Bonds: Also called "participant", although it is not directly guaranteed, it requires the payment of interest only when there are profits available to make the payment, they have the advantage that the interest paid is quite high.
