Bank debt vs. bonds
What interest does a company have in issuing bonds rather than taking out a loan from a financial establishment?
It is true that, in pure accounting terms, i.e. nominal
interest paid by the company, bonds usually cost more than bank loans. But this
is due to the fact that banks generally demand higher collateral than bondholders.
Here is, once again, the classical link between risk and reward.
A bond is generally issued with standard clauses that leave issuing companies with lots of latitude. Banks, on the other hand, put borrowing companies under covenants. Such covenants limit the borrowers' leeway. For certain transactions, such as disposals, acquisitions, payment of exceptional dividends and issuance of new debt, they must obtain the banks' agreement beforehand. There are more and more covenants in bilateral contracts between banks and group subsidiaries, and they can be a real headache to manage.
On the other hand, some types of bank credit, such as credit lines, give the company flexibility on when it actually takes out the funds, something that bonds don't do (bonds must be issued for significant sums, without the company necessarily having immediate cash needs).
For companies that can issue bonds, doing so also opens
a new source of financing. Tapping the bond market for the first time takes
a relatively long time. The company most often has to have obtained a de facto
rating from an agency, and investors must already be familiar with the company.
A second issue, however, can usually be arranged quite rapidly.
For some major groups, credit lines are limited by the exposure that a bank can have in its own name (because of concentration of risk). This is a growing problem, given the consolidation in the banking sector. The bond market gives an issuer access to other investors and, in this case, allows it to enhance the amount of debt raised.
Meanwhile, a company that taps both credit lines and bond issues maximises its chances of being able to raise debt financing at any moment.
One last thing: a public bond issue helps makes the company better known.
All in all, there are no obvious choices but rather a goal of diversifying risks and ultimately establishing relationships.