Offering Debentures

In a falling market, an offer of shares would be very difficult, not to say impossible; in this case, an offer of debentures would be the only way possible.

It also happens that an offer of shares in a falling market would give place to a substantial dilution of the share capital of a company. The level of the types of interest also performs a significant role to determine the convenience to offer shares or to issue debentures. If the type of interests are on rise or are extremely high, the rate of interests of a new emission of debentures (which represents some expenses by interests to the issuing company) will be high. In these cases, it would be best to emit shares. The nature of the project also exercises an influence as in the form it will be financed. If the money is needed for an specific project (as for example, the construction of a new factory or the modernization of the one in existence) the most probable is that the management and its investment bank will decide for an emission of debentures due that, in this case, you can determine in a concrete way the costs and profitability of the operation. Now then, if the funds don’t have a specific finality within the company and if the market of securities is especially strong, then the best alternative would be the offer of shares.

In other societies, the management might see with good eyes the resource of debt and are willing to level the assets of the society  (to increase the outer funds of the company in relation with its capital). The use of leveling produces spectacular effects due that it amplifies the results of the society no matter if they are positive (increase of the benefits) or negative (diminishing of the benefits).

As an investor, you should be familiarized with some of the terms and concepts used by the executives and investors when they refer to the financing through debt ant to the selling of shares.

You always have to make decision about if the financing is going to be done by issuing a debenture loan or by selling shares, here enters into the game the outer funds/own funds ratio. This ratio expresses what percentage of permanent funds of a company represents the long-term debts and what percentage represents its own funds.

As is logical, the boards of directors make efforts to maintain a balance between these two components (outer sources and own sources) in their capital structure.

The ratio of outer and own funds gives the investors an idea of how the company is excessively leveled or if the exposit, it’s diluting its own share capital by the emission of too many shares.

“Lucrative utilization of the capital loans” is another expression with which you should be familiarized; it is applied to the company that is obtaining higher profitability rate from that of its business (own funds). Than what is costing the money from the loan (outer funds). Said in another way: the lucrative use of the loaned capital means that the profitability rate that a company should get with its business is superior to the type of interests that he has to pay for the loaned money. If that is so, it is logical for the company to ask for loans, due that they are capable of obtaining from it large money profits.