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The Advantages of Firms for Issuing Bonds

Original post by Geri Terzo of Demand Media

Credit rating agencies rate corporate bonds based on risk.

One of the primary advantages for firms that issue bonds is the resulting capital to which the organizations gain access. By raising money in the bond market, organizations have the potential to secure low and attractive interest rates over many years. Issuing bonds can also support the process of short-term or long-term budgeting, and can give a company the financing it needs to restructure a business.

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Demand

Investor demand for bond investments could be the difference between a corporation's decision to issue bonds or turn to bank lenders for financing. According to a 2010 report in Fund Evaluation Group, corporations issued a record $175 billion in high-yield bonds, which are a risky type of debt security that pay high interest rates, in the first nine months of that year amid rising investor demand. The report indicated that a trend toward high-yield bonds and away from bank loan funds, which tend to be stable investments, was expected to take root by 2013.

Debt

A company that is having difficulty managing its debt can turn to the bond markets to raise capital. According to a 2011 article in Reuters, Cement company Cemex issued more than $1 billion in bonds amid a troubled acquisition that left it scrambling to repay debts. Cemex opted to issue convertible bonds, which are converted to equity shares at some time in the future. The proceeds of the sale were designated for repaying existing creditors.

Merger

Bond issuance can help companies get merger deals completed in the capital markets. The buyer in a merger deal may not be willing to pay equity for the entire price of the deal, and debt financing is another option. A 2011 leveraged buyout deal in which private equity firm The Carlyle Group acquired CommScope involved both equity and debt components. A leveraged buyout is a type of deal where a publicly traded company becomes private. CommScope issued $1.4 billion in bonds into the debt markets to get the deal done, according to Standard & Poor's.

Borrowing Costs

Corporations that seek to raise money in the financial markets have two primary options, including the equity and debt capital markets. Bond issuers agree to pay investors consistent interest payments based on the interest rate that is attached to the debt security. When interest rates are low, firms can lock in these rates for the duration of the bond contract. Although this is not ideal for investors, it is an inexpensive way for companies to borrow money.


                   

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About the Author

Geri Terzo is a business writer with over 15 years experience reporting on Wall Street. Her coverage ranges from institutional investing, including hedge funds and investment banking, to family topics and her career experience includes work for Fox Business, CNBC and "IDD Magazine." Terzo is a graduate of Campbell University, where she earned a B.A. in mass communication.

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