HOW TO GET OUT OF CORPORATE DEBT AND MAKE BETTER BUSINESS DECISIONS

Is your company having problems with corporate debt? Or you’d want to know more about this topic? Find out all about these from our guest blog writer for today. Learn all about debt securities and long term debts for better financial, managerial and marketing decisions for your business.

Corporate debt is defined as non-government debt securities. Long-term debts are issued as bonds while short-term debts are issued as commercial paper.

Corporate bonds, also referred to as corporates, are IOUs or debt obligations issued by public and private corporations. They are usually issued in multiples of $5,000 and/or $1,000. When you purchase a bond, you lend money to the issuing corporation. This corporation, in turn, promises to give your money back on a pre-determined maturity date. You continue to earn an interest rate until you get your money back. Unlike stocks, however, bonds don’t grant you any ownership interest.

Corporate bonds fall under two main categories: investment grade and high yield. Investment grade bonds have minimal default likelihood while high yield bonds have a higher risk of default.

KEEP AN EYE OUT FOR CORPORATE DEBT

Both categories of corporate bonds come in different types, such as split-coupon bonds, straight cash bonds, pay-in-kind bonds, extendable reset notes, floating-rate and increasing-rate notes, multi-tranche bonds, deferred-interest bonds, and convertible bonds.

The stock market is not the only thing that you ought to be worried about. You also have to keep an eye out for the bond market. In recent years, corporations have been operating in financial paradise. Wages were flat and interest rates were down. Companies slashed costs and laid off employees. Profits also reached an all-time high.

So, what were the implications of all these? In 2007, the United States Federal Reserve reported that non-financial corporations owed more than $7 trillion. Today, such debts have increased to over $9 trillion, proving that corporate balance sheets are not in good shape. Non-financial corporations have debts that are equivalent to 50% of their net worth.

This is alarming, considering that in the 1950’s companies only owed about 20% of their net worth. The figures went a little higher in the 1980’s, but that was just 25%.

DOES CORPORATE DEBT DRAG INVESTORS DOWN?

If you are planning to make investments in a company, see to it that you consider various financial records. Do your research carefully, so you’ll know if it is indeed a good investment.

Before you purchase bonds, you must check the cash flow of the company and determine if it is consistent and healthy. Don’t forget to check out their interest cover or the ratio that shows how easily they can meet the interest repayments on their debt.

Ideally, the bond issue’s details should include what the bond debt is secured against and what your position would be in case the company goes under. If the details are unclear to you, you should call the company.

See to it that you also weigh the possible consequences of investing all your money in a single company or spreading your risk by purchasing a bond fund. If you do not have any previous experience in this matter, it is best to seek help from a financial advisor.

If you are only attracted to the bonds because of their interest rate, consider if it is really worth the risks involved. In general, the higher the rates, the higher the risks.

When you finally invested in the company and then they suddenly decided to borrow money, what should you do? Will their debt affect your investments?

As an investor, you have the option to continue or pull out your investments. If you are not sure whether or not to stay with the company that has taken on a new debt, ask yourself what kind of debt the company is taking on and how much debt they already have.

Keep in mind that the fixed-income securities and loans that companies issue differ in maturity dates. Find out if the interest rate and length of such debt is ideal for financing the projects that the company hopes to undertake.

If the company does not have any debt, then taking on a new debt might actually be beneficial since it allows them to reinvest resources into their operations. On the other hand, if they already have too much debt, you may want to consider pulling out your investments.

Having too much debt is obviously not a good indication. It greatly affects the ability of the company to create cash surplus. In addition, too much debt can affect common stockholders in a negative manner. Basically, the more debt financing a company uses, the higher its risk of bankruptcy.

Furthermore, find out if the company can afford to pay off their debt. Companies that increase their debt loads must have plans for repaying such debts. If the company goes bankrupt, you may receive pennies on the dollar. You may also get some of the proceeds. However, it is unlikely that you will get back your original principal.