One thing that you may not know about corporate bonds right off the bat: Issuing a corporate bond might be a necessary step in growing your business. When companies reach a point where more funding is needed, this is one key option to consider. Follow this checklist to explore the major factors to weigh in deciding whether a corporate bond is your best financing option.

  1. Does the company need to raise the funds externally?
    Funding from external sources is always more expensive than using internal sources, so seeking the required funds internally is an important starting point. Places to look include subsidiaries with surplus cash, or perhaps a review of cash management across the group is necessary. A review can usually identify areas for improvement such as debtor, stock, trade or creditor management, capital expenditure, recruitment, executive perks, asset disposals, and bank cash management such as float time, bank charges and idle surplus cash.
  2. If cash must be raised externally, how much is needed now and in the future?
    A cash flow forecast that is updated periodically, setting out receipts, payments and net flows per month, can provide a useful guide to funding needs, thereby avoiding unnecessary interest costs from borrowing too much cash too soon. (Several factors affect the taxable interest that must be reported. Learn more in Bond Taxation Rules.)
  3. Which market would be optimal for the issue?
    Should the offer be a private placement or public? Should the banking market be used instead of the capital markets, either exclusively, or in combination, and if so should it be a bilateral or syndicated bank transaction? Get the advice and view of the company's relationship banks, and weigh the benefits and drawbacks of each market carefully. (Corporate eurobonds simplify expansion for MNCs, though there are a few more hoops to jump through. Check out The Ins And Outs Of Corporate Eurobonds.)
  4. Should the bond be secured, fixed rate, convertible to equity or have early redemption options?
    This is an important aspect of the issue to consider, as it will affect when and how much financing the company stands to receive, as well as the company's risk in issuing the bond. (Find out how businesses weigh the pros and cons of convertible bonds as an alternative form of financing, see Why Companies Issue Convertible Bonds.)
  5. Is a debt issue the most appropriate way to raise the required funds?
    Issuing more debt might raise the company's gearing too high, so perhaps an equity issue is better. A company might also consider a issue quasi-equity such as mezzanine debt or a hybrid bond. Seek out the views of the company's rating agencies and determine whether they would view the issue favorably in terms of the company's credit rating.
  6. Is debt appropriate given the company's stage of development and its ability to service the debt obligations or the economic outlook for the company over the expected life of the debt?
    If the company is a start-up, it is unlikely to generate revenue for a few years, until it has a product or a production facility, so an added burden to pay interest might soon drive it into insolvency. If the company is experiencing a lull in revenue because of a recession, debt will only exacerbate its cash flow problems, so it's better to defer debt interest if possible, such as by issuing a zero-coupon bond. (Learn more in our Advanced Bond Concepts Tutorial.)
  7. What non-negotiable terms will the company need to accept from lenders?
    These include terms related to the interest rate, security, term of the debt, covenants, early repayment, currency and convertibility. Consider how much each of these will constrain the company's operations over the term of the bond, and whether the company will be forced to pay excessive fees for waivers.
  8. Is there a well-functioning market for the company's debt?
    If the company's debt is illiquid, it is likely to be relatively expensive owing to illiquidity. The market the company chooses to issue in could set a precedent for subsequent issues in that market as well. (You might want to check out Bonds You May Never Have Heard Of.)
  9. Will the company need to execute hedges to manage risks?
    Currency and/or interest rate risks might apply. If the company intends to hedge such risks, how will these hedges be executed and administered? Does the company have the necessary expertise and infrastructure to execute and administer hedges? What are the tax and accounting implications of these hedges on the company's P&L and balance sheet? Will they for example, meet hedge accounting? Will withholding tax be deductible, thereby reducing investors' yield? (For more insight, see Corporate Uses Of Derivatives For Hedging.)
  10. Has consent been obtained if waivers from other debt providers will be necessary to issue the debt?
    If for example, the bond is to be secured but the company has already given a negative pledge to existing debt providers, a waiver could be required.
  11. Who is going to arrange the transaction and administer it?
    Who is the issuer going to be and where will it be domiciled? This decision can have significant implications for subsequent tax treatment. (Learn more in Who are the major players in the bond market?)
  12. What will the various transaction costs be (in addition to interest rate)?
    Transaction costs include underwriting and arrangement fees, hedging, rating agency fees, printing, listing, trustee fees and custodian fees. Find out which costs apply to your company how much these costs will be. How does this cost compare to the company's other sources of funding?
  13. What is the urgency of funds and can this be met with this debt issue?
    Ongoing needs for funds can often be met efficiently with a program of issuance, such as a medium-term note program, or a commercial paper program, whereas single large term issues can take longer to prepare and execute. Private placement transactions are relatively quick to arrange since, in contrast to public issues, they avoid the regulatory requirements of producing listing documentation and seeking listing exchange approval.

There are many factors to consider when your company requires a new source of funding. Be aware of all your options and, most importantly, the implications that go along with each choice. There is an option that is right for your company. (Learn how and why investors are using cash flow based analysis to make judgments about company performance, read Taking Stock Of Discounted Cash Flow.)

Related Articles
  1. Investing Basics

    Explaining Options Contracts

    Options contracts grant the owner the right to buy or sell shares of a security in the future at a given price.
  2. Home & Auto

    When Are Rent-to-Own Homes a Good Idea?

    Lease now and pay later can work – for a select few.
  3. Entrepreneurship

    What Does Bootstrap Mean?

    The term bootstrap refers to launching and building a business with little capital and no funding from outside sources.
  4. Insurance

    Who is a Beneficiary?

    A beneficiary is a person or entity that receives funds, assets, property or other benefits from a trust, will, or life insurance policy.
  5. Economics

    Explaining the Balanced Scorecard

    A balanced scorecard is a metric that measures a business’ performance.
  6. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  7. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  8. Mutual Funds & ETFs

    ETF Analysis: Guggenheim BulletShrs 2018 HY CorpBd

    Find out about the Guggenheim BulletShares 2018 High Yield Corporate Bond ETF, and get information about this ETF that focuses on high-yield corporate bonds.
  9. Retirement

    Strategies for a Worry-Free Retirement

    Worried about retirement? Here are several strategies to greatly reduce the chance your nest egg will end up depleted.
  10. Professionals

    Small RIAs: How to Level the Playing Field

    In order to compete with larger firms, small RIAs have to get a little creative. Here are a few ways to kickstart growth.
RELATED TERMS
  1. Interest Coverage Ratio

    A debt ratio and profitability ratio used to determine how easily ...
  2. Corporate Social Responsibility

    Corporate initiative to assess and take responsibility for the ...
  3. Corporate Culture

    The beliefs and behaviors that determine how a company's employees ...
  4. Derivative

    A security with a price that is dependent upon or derived from ...
  5. Security

    A financial instrument that represents an ownership position ...
  6. Series 6

    A securities license entitling the holder to register as a limited ...
RELATED FAQS
  1. What is the relationship between the current yield and risk?

    The general relationship between current yield and risk is that they increase in correlation to one another. A higher current ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What happens if my insurance claim falls below the deductible level?

    Though the ins and outs of health insurance are often confusing, the concept of the insurance deductible is relatively straightforward. ... Read Full Answer >>
  6. How is the deductible I paid for my insurance claim treated for tax purposes?

    The deductible you pay on your health insurance policy may be tax-deductible if you meet certain conditions. However, whether ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!