Financing Tool In North American Capital Market (II)

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Financing Tool In North American Capital Market (II)

Debt financing

Debt financing can make North American companies to gain fund, and the paid interest offset their due taxes at the same time—this is a key factor to be stressed by North American companies in designing their financing plan. If a company borrows too many debts, interest expenditure will be a heavy burden to it. Interest expenditure is mandatory—this is different from the risk sharing principle for equity, and the creditor concerned may institute a law suit if the said company fails to pay interest on time, and then such company cannot operate as usual. Additionally, the level of a company’s debt burden is a key index to be measured by banking institutions to know about the operation of such company—the excessive high level of debt burden means the increased risk. Even in such case, many companies have selected to issue bonds for raising fund under the macro-environment in USA that the current interest rate is lower. Out of the China’s concept stocks, Sohu used to issue bonds successfully in USA. The credit rating shall be obtained for issuance of bonds from Moody and Standard & Pool.

A. Convertible bond

Convertible bond is similar somehow to the convertible preference share as mentioned hereinabove, whereas the former is more acceptable to investors in terms of the security of fund, for it is a loan bond and shall be paid off when it become due. Subscribers may convert convertible bond to common stock within the time limit as specified, so it is more possible for investors to increase the return arising from the increased price of shares concerned. This financing tool has been present in Chinese Mainland and adopted by some listed companies. Convertible bond can dilute the earnings per share, for it can be enlarge the scale of common stock—so it is deemed by investors in Chinese Mainland as a new tool of listed companies to “make money”.

Extendible bond or callable bond

Such bond provides a convenience to its subscribers who can select to extend the held bond after the fixed number of years so as to maintain the original interest income of such bond, or to ask to pay off the principal. Such bond is created due to the uncertainty of interest rate environment and economic development, for investors will not buy in the bonds with overlong time limit—this is why investment bankers have designed such financial instrument.

C. Callable bond or redeemable bond

Such bond provides different rights to bond issuers and buyers. Callable bond agrees that its issuer can redeem in advance in some cases—usually arising from the decreasing interest rate and increasing bond price (Note: interest rate is inversely proportional to bond price). Bond issuer may issue bond at much lower interest rate for financing to reduce the cost for such financing. This clause is undoubtedly favorable to such issuers. As to redeemable bond, the buyers of such bond may ask such issuers to pay off such bond as agreed, and then such buyers will buy in the bonds with higher return or other investment products by means of their fund from such paying off. This clause is apparently favorable to bond buyers.

Only some typical kinds of bond are selected and introduced hereinabove. Factually, investment bankers will create many bond categories satisfying the demands of investors at different periods, so as to meet the requirements of both issuers and investors.