Debt Financing and Leasing Options for Businesses
Notes, Loans, and Long-Term Leasing
A. Bond Issuance
When a company requires substantial capital, it can issue bonds, dividing the total debt into smaller units sold to individual investors. These units, representing portions of loans, are known as debentures, bonds, or notes. Each bond acts as a certificate of indebtedness, entitling the holder (creditor) to interest payments and eventual repayment of principal. A banking syndicate often guarantees these loans to enhance investor confidence.
Note 4: Rights and Obligations of Shareholders and Bondholders
Shareholders
Shareholders possess both economic and political rights, along with certain obligations.
- Economic Rights:
- Right to receive dividends (if declared by the company).
- Right to a portion of the company’s value upon liquidation.
- Right to freely trade shares.
- Preemptive right to purchase new shares during capital increases.
- Political Rights:
- Right to attend and vote at general meetings (subject to minimum share ownership).
- Right to access company information.
- Right to request an audit (subject to legal and bylaw requirements).
- Obligations:
- Obligation to fully pay for subscribed shares.
- Liability for company losses limited to their invested capital.
Bondholders
Bondholders are creditors and primarily hold economic rights.
- Rights:
- Right to receive contractual interest payments, regardless of company performance.
- Right to full repayment of principal upon maturity.
- Obligations:
- Obligation to pay the bond’s purchase price.
Key Bond Terminology
- Nominal Value: The face value of the bond, used to calculate interest payments.
- Interest Rate: The bond’s yield, applied to the nominal value.
- Issue Price: The price at which the bond is sold (at par, above par, or below par).
- Amortization Period: The time frame for principal repayment.
- Share Premium: The difference between the issue price and nominal value (negative difference is a discount).
- Reimbursement Rates: The amount paid to the bondholder upon redemption.
- Guaranteed Obligations: Bonds backed by company assets.
- Convertible Debentures: Bonds that can be exchanged for company shares.
B. Loans and Long-Term Bank Loans
Loans
A loan involves receiving a sum of money with the agreement to repay it within a specified timeframe and under specific conditions.
- Interest Rate: The cost of borrowing.
- Repayment Period: The allowed time for repaying principal and interest.
- Required Warranty: Collateral requested by the lender (e.g., mortgage).
- Amortization Mode: The schedule of principal and interest payments.
Credit Lines
A credit line provides access to a specified amount of money, with interest paid only on the amount used. This is advantageous for managing cash flow fluctuations.
C. Leasing
Leasing allows businesses to use assets (machinery, premises, vehicles) without outright purchase. There are two main types:
Financial Leasing
This is essentially a lease-purchase agreement involving three parties: the leasing company (lessor), the user (lessee), and the supplier. Financial leases typically last 2-6 years for movable assets and over 10 years for buildings. Early contract termination is usually not permitted.
Operational Leasing (Renting)
This type of lease includes both financing and maintenance. The contract period is shorter (1-3 years), and early termination may be possible. The lessee typically has the option to purchase the asset at a predetermined price.