ECM specifika Flashcards
Rights issues
Rights issues are a common method for companies to raise capital while providing existing shareholders with the opportunity to maintain their proportional ownership in the company. They offer flexibility and cost-effectiveness compared to other forms of equity financing. However, shareholders must carefully evaluate the terms of the rights offering and consider their investment objectives before deciding whether to exercise their rights.
Accelerated Bookbuilds (ABBs):
ABBs are a type of offering in which shares are sold by a company to institutional investors directly, without the need for an extensive marketing process or roadshow. The process is usually facilitated by investment banks or broker-dealers, who act as intermediaries between the company selling the shares and the institutional investors purchasing them. ABBs are often used when a company needs to raise capital quickly or when there is a significant demand from institutional investors for the company’s shares.
Block Trades:
Block trades involve the sale or purchase of a large number of shares (a “block”) in a single transaction, typically between institutional investors. These transactions are often negotiated off the public exchanges and can involve significant volumes of shares, sometimes representing a substantial portion of a company’s outstanding shares.
Block trades are commonly used by institutional investors, such as mutual funds, pension funds, and hedge funds, to buy or sell large positions in a company’s stock efficiently without impacting the market price.
Investment banks or broker-dealers often facilitate block trades by matching buyers and sellers and executing the transactions on their behalf. In summary, ABBs and blocks both involve the sale of large volumes of shares, but they differ in their specific contexts and processes. ABBs are typically offerings by companies to institutional investors to raise capital quickly, while block trades are transactions between institutional investors for the purchase or sale of large positions in a company’s stock.
Equity-linked instruments
Equity-linked instruments are financial securities whose value is tied to the performance of an underlying equity instrument, such as a stock or stock index. These instruments offer investors exposure to equity markets while providing additional features or characteristics not typically found in direct stock ownership. Here are some common types of equity-linked instruments:
Convertible Bonds:
Convertible bonds are debt securities that can be converted into a predetermined number of shares of the issuer’s common stock at the option of the bondholder. They offer fixed-income characteristics with the potential for equity upside if the issuer’s stock price increases.
Equity Warrants:
Equity warrants are financial derivatives that give the holder the right, but not the obligation, to buy a specified number of shares of a company’s stock at a predetermined price within a certain time frame. Warrants are often issued together with bonds or preferred stock as a sweetener to attract investors.
Equity-Linked Notes (ELNs):
ELNs are debt securities with returns linked to the performance of an underlying equity index, basket of stocks, or individual stock. They offer investors exposure to equity markets while providing downside protection through fixed-income characteristics.
Structured Products
Structured products are financial instruments created by combining traditional securities with derivatives to create customized investment solutions. They can be linked to equities through features such as principal protection, participation in equity returns, or downside risk mitigation.
Stock Options:
Stock options are contracts that give the holder the right, but not the obligation, to buy or sell a specific number of shares of a company’s stock at a predetermined price within a specified period. Options can be used for hedging, speculation, or generating income through covered call writing or put selling strategies.
Equity-Linked Certificates:
Equity-linked certificates are investment products issued by financial institutions that provide exposure to a specific equity index or basket of stocks. They offer investors the opportunity to participate in equity market returns while providing downside protection through structured features.
How do convertible bonds affect a company’s capital structure?
Initially increases leverage: Convertible bonds are recorded as debt, increasing the company’s leverage ratio.
Potential to convert to equity: If converted, they reduce debt and increase equity, potentially diluting existing shareholders.
Lower interest costs: These bonds generally offer lower interest rates than traditional debt.
Flexibility in financing: They offer a strategic financing option that can be beneficial in different market conditions.
EPS impact: Conversion dilutes shares but reduces interest expense, affecting EPS calculations.
Market signals: Issuing convertible bonds can signal various intentions to the market, impacting investor perception.
Explain what convertible bonds are and how they differ from regular bonds.
Convertible bonds are hybrid securities blending elements of bonds and stocks. They grant bondholders the option to convert into a set number of shares of the issuing company’s common stock. This flexibility allows investors to benefit from potential equity gains if the stock price rises. Like traditional bonds, convertibles pay periodic interest until maturity, but they often offer lower rates due to the conversion feature. Unlike regular bonds, convertibles offer investors a chance to participate in stock price appreciation. This unique risk-reward profile makes convertibles a distinct investment choice, often exhibiting market behavior influenced by both stock prices and interest rates.
Can you discuss the key features of convertible bonds?
Convertible bonds are hybrid securities with features of both bonds and stocks. They allow bondholders to convert their bonds into a predetermined number of shares of the issuing company’s common stock. This conversion feature provides investors with the potential for equity upside if the stock price rises. Convertible bonds also pay periodic interest payments like traditional bonds, providing a fixed-income component to investors. They have a maturity date, conversion ratio, and conversion price, which are predetermined at issuance. Additionally, some convertible bonds may include call provisions, giving the issuer the right to redeem the bonds before maturity. Overall, convertible bonds offer investors a unique investment opportunity by combining fixed-income characteristics with the potential for equity participation.
What are some advantages and disadvantages of investing in convertible bonds?
Advantages:
Equity Participation: Investors can benefit from potential stock price appreciation.
Fixed-Income Component: Convertible bonds offer steady interest payments.
Diversification: They provide a balanced mix of debt and equity in an investment portfolio.
Lower Interest Rates: Issuers often offer lower interest rates compared to traditional bonds.
Flexibility: Investors have the option to convert bonds into equity.
Disadvantages:
Limited Upside Potential: The extent of equity upside may be constrained.
Interest Rate Risk: Changes in interest rates can impact the value of convertible bonds.
Credit Risk: There’s a possibility of default by the issuing company.
Complexity: Understanding terms like conversion features can be challenging.
Liquidity Risk: Convertible bonds may have lower liquidity than stocks or traditional bonds.
When should it be preferable to use equity for an acquisition?
Debt is often perceived as cheaper than equity due to factors such as tax deductibility of interest payments, fixed interest rates, lower expected returns for investors, collateralization, and seniority in the capital structure. These factors contribute to lower borrowing costs for companies using debt financing. However, debt also comes with risks such as interest payments, debt covenants, and bankruptcy implications. Therefore, the choice between debt and equity financing depends on factors like growth prospects, risk tolerance, and market conditions, and the optimal capital structure balances both types of financing.
