What Is an Issue?

What Is an Issue?

Let me explain what an issue means in this context. An issue is essentially the process where a company offers securities to raise funds from investors. You might see companies issuing bonds or stocks as a way to finance their operations.

The term 'issue' also points to a specific series of stocks or bonds offered to the public, usually tied to one particular offering. Think of it as the batch of instruments released together.

Key Takeaways

Here's what you need to grasp right away. An issue involves offering new securities to investors to bring in capital. When it comes to bonds, issues can continue as long as investors are interested in the company's debt, and that interest hinges on the company's ability to handle payments.

On the stock side, issuing more shares leads to dilution, which can drive down stock prices. Keep these points in mind as we go deeper.

Understanding Issues

Issuing securities comes in different forms, and I want you to understand them clearly. A company might do a new issue, releasing a security for the first time, or a seasoned issue, where an established company offers more shares. Generally, an issue refers to a specific offering.

For instance, if a company sells a group of 10-year bonds to the public, that entire set is considered one issue. When a company needs capital, options include selling stocks or issuing bonds. In a secondary offering, the board votes to issue more shares, increasing what's available in the market, and the proceeds go straight to the company.

Similarly, if a business wants to refinance debt, it might issue bonds. This means borrowing from investors and repaying with interest, which is tax-deductible and lowers borrowing costs.

Factors in Issuing Stocks or Bonds

You have to consider business goals when deciding between stocks or bonds. Issuing either changes the company's capital structure, which is the mix of debt and equity. How balanced that is affects the cost of capital.

The cost for debt is the interest paid to investors, while for equity it's dividends. Striking a good balance helps avoid high costs. Equity investments don't need repayment, and dividends aren't mandatory like bond interest.

But there's a limit to stock issuance because dilution affects ownership. Bonds, however, can be issued as long as investors are willing to lend. Issuing bonds is cheaper than bank loans since companies pay lower interest and keep more control. Bonds don't alter ownership, unlike stocks, and record-keeping is straightforward with uniform rates and dates. Plus, bond offerings offer more flexibility than stocks.

Stock and Bond Underwriting

Companies often use investment banks to handle issuing stocks and bonds. If a company sells bonds, the bank evaluates the company's value and risk, sets prices, and underwrites and sells them publicly or privately.

Banks also underwrite stocks for IPOs or secondary offerings, sometimes assigning book runners for big accounts. Underwriting means researching and assessing risks for a new issue, which sets fair rates and creates a market by pricing risks accurately.

If risks are too high, underwriters might bow out or demand higher yields. This process ensures the company raises needed capital and gives underwriters a profit. Investors get vetted information for informed decisions.

Underwriting covers individual stocks and various debt securities like government, corporate, or municipal bonds. Underwriters buy these to resell for profit to investors or dealers. When multiple underwriters are involved, it's called a syndicate.