All companies, governments, states and organisations need to raise additional finance for different purposes. There are several different methods, such as bank loans, bonds, notes, structured products or new equity, available to obtain the required amount of money.
The set of financial sources used by a corporate entity is called the company´s capital structure. Commonly, a company uses a number of different sources to safeguard access to sufficient amount of capital. Two of the most important sources are loan financing and bond financing. These two sources will be compared in the second part of this essay. In the first, the issuing process, the distribution and marketing process and subsequent service of Eurobonds will be discussed.
As observed above, bond financing is an important source of long-term funding for corporate entities. Simply, it is a way of borrowing money that later needs to be repaid, often with interest. In many respects, the issuance of bonds has a lot in common with borrowing from a bank. At the same time, it has its own characteristics.
The bond instrument is of bearer character, which gives the holder of the instrument the right of repayment at maturity. The bearer could also realise the value of the bonds prior maturity by selling them on the secondary market. The funds received could then be used for other investment purposes.
As observed above, bonds are issued to secure access to a sufficient amount of capital. There are many different types of bonds. Domestic bonds are bond issued in the home currency of the issuer while Eurobonds are international bonds issued in another currency than the local currency of the issuer and not native to the country of issuance.
Eurobonds are often marketed, distributed and sold by a syndicate of underwriters or managers. These are responsible to place the bonds among investors and they are also obliged to pay for unsold bonds at the closing day. By paying a fee, the issuer can protect himself against unsold bonds.
According to the pecking order theory, corporate managers prefer to use internal financing first, secondly they issue debt, and as last resort they issue new equity. The biggest benefit of bonds is that it, when it is used in combination with bank loans, allows the company to create a well diversified funding structure. This diversification benefit is important since the company becomes less dependent on one source and more resistant to temporary disruptions in the markets. Using both loan and bond financing also allow the company to create a capital and funding structure that matches the individual requirements of the company. This is the most important conclusion of this essay!
