The issuance of debentures is an act by which a company obtains financing. The company, through this act, contracts a loan that is divided into securities, which are acquired in the market by investors who buy said security in exchange for a return.
Technically, the issuance of obligations is an act carried out by any legal person that wishes to obtain financing. Thus, once it is formalized in a public deed and the pertinent procedures are carried out to carry out the operation, the company acquires a loan that is divided into titles to trade them in a market.
These obligations are subsequently acquired by investors who disburse the capital, being the lenders in the operation, in exchange for future performance. The borrower, the lender or bondholder, must pay the future interest rate plus the nominal.
It should be added that these obligations can be issued by a future indebtedness, or a previous indebtedness. That is, obligations from a previous loan can be issued, thus converting the creditors of said loan into bondholders.
Likewise, it should be noted that the obligations differ from other debt securities such as the bond or the promissory note due to the fact that we are talking about very long-term debt, considering a period of more than 10 years.
In summary, we are talking about an offer made by a company, also known as an issuing entity, of a loan of which it will be the borrowing party. On the other hand, each lender will be the subscriber of the obligation that it acquires and, later and being publicly registered, will become a bondholder that will obtain a return.
Characteristics of a bond issue
Among the characteristics that best define what a bond issue is and what it is done for, we can highlight the following:
- It is a tool to obtain financing from a company.
- The company seeks to acquire a loan that it divides into titles and that it markets.
- These securities are acquired by investors, who become bondholders.
- In exchange for a disbursement, the bondholder receives a certain interest, which must be paid by the borrower together with the nominal amount.
- The obligations, unlike other debt securities, are characterized by being very long-term.
- All this process must be formalized in a public deed, and the corresponding procedures ordered by the State must be carried out.
Difference between obligations, bond and promissory note or bill
As we said in the previous section, it is convenient to distinguish between obligations, bonds and promissory notes. Well, these three types of debt securities have similarities, but also differences. Although, as we will see below, these differences are slight, and are based on the amount of debt and time.
Thus, a promissory note is a type of debt security in which the repayment period is usually shorter, between 12 and 18 months. In this sense, the money, together with the interest, is returned in the short term. Therefore, this investment, in the same way, is considered a short-term investment.
On the other hand, a bond is a type of debt security in which this term (repayment) is longer, between 3 and 5 years. In this sense, we are talking about a medium-long term investment. The bonds, like the promissory note or the obligation, confer on their subscribers the right to collect the debt plus the corresponding previously determined interest.
Finally, the obligation is a type of debt security in which said term (repayment) is longer than those mentioned above. In this sense, we are talking about very long-term debts and large volumes of financing. If we have to say a term, we would say that we are talking about debts to be repaid in a period of more than 10 years. However, the time deemed appropriate before its issuance may be extended.
Difference between issuance of obligations and issuance of shares
Likewise, it is convenient to point out the distinction between what we know as "issuance of bonds" and what we call "issuance of shares." Being called "broadcast" can confuse us, but as we will see below, it is easy to understand the differences.
Thus, a bond issue, as we said, is an act by which a company obtains financing. The company, through this act, contracts a loan that is divided into securities, which are acquired in the market by investors who buy said security in exchange for a return.
On the other hand, the issuance of shares is an act by which a company obtains financing. However, a debt is not issued (as in the issuance of obligations), but a percentage of the company that is traded and acquired by investors.
Example of a bond issue
To finish, let’s look at an example of a bond issue.
Imagine a company like Pepsico, which requires new capital to open its business in new unexplored territories and where Coca Cola is gaining more and more presence.
Thus, Pepsico addresses shareholders to communicate this need to raise capital. In addition, the good performance of Coca Cola has meant that the company is not in a position to sell shares and obtain capital through this route.
All shareholders agree to issue bonds, which would have an annual interest, being a cost for Pepsico and a benefit for the subscriber or bondholder, of between 3 and 4% with the possibility of increasing as the amount of the bond increases. operation.
Once the strategy has been decided, a contract will be made in order to clarify and formalize the issuance of obligations, as well as the benefits that the bondholders will have before public deed, and the corresponding procedures will be carried out.