AdeptDz
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Why would a company take a loan from a commercial bank rather than to sell bonds with the aid of an investment bank? And vice versa


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DetectivePeralta
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(Original post by AdeptDz)
Why would a company take a loan from a commercial bank rather than to sell bonds with the aid of an investment bank? And vice versa


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The question should really be: "Why do banks sell bonds with the aid of an investment bank when they could take a loan?"

Most small businesses like a corner shop take loans because it's not worth it to ask an investment bank to create bonds (you have to pay the bank fees for them to create the bonds and it would be cheaper and easier for them to just take a loan. Plus I don't think banks would waste their time on making bonds for a small business).

However, large businesses need to borrow large amounts and might want more freedom on how to spend the borrowed money. Bank loans specify an end-use but bonds don't so the business can choose what they spend it on. The money the business has to pay bond holders would also be less than the interest they would have to pay the bank.
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AdeptDz
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(Original post by Trapz99)
The question should really be: "Why do banks sell bonds with the aid of an investment bank when they could take a loan?"

Most small businesses like a corner shop take loans because it's not worth it to ask an investment bank to create bonds (you have to pay the bank fees for them to create the bonds and it would be cheaper and easier for them to just take a loan. Plus I don't think banks would waste their time on making bonds for a small business).

However, large businesses need to borrow large amounts and might want more freedom on how to spend the borrowed money. Bank loans specify an end-use but bonds don't so the business can choose what they spend it on. The money the business has to pay bond holders would also be less than the interest they would have to pay the bank.
Thank you
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Commercial Paper
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(Original post by AdeptDz)
Why would a company take a loan from a commercial bank rather than to sell bonds with the aid of an investment bank? And vice versa


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Simple answer:

Large companies raise bonds because often they have a good credit rating and are well-known. This lowers their borrowing costs. Banks also do not want to loan billions of their own capital to one client, it's too much risk. This is why loan syndication exists.

A small or medium sized company would rather take a loan as it would be a costly exercise for it to try and raise money across financial markets (bank fees, credit rating fees, higher interest rate as no one knows who you are, marketing to investors etc.) There may also be insufficient demand to purchase the debt of a small company and due to the lower amounts involved, may be cost prohibitive to an investment bank.

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AdeptDz
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(Original post by Commercial Paper)
Simple answer:

Large companies raise bonds because often they have a good credit rating and are well-known. This lowers their borrowing costs. Banks also do not want to loan billions of their own capital to one client, it's too much risk. This is why loan syndication exists.

A small or medium sized company would rather take a loan as it would be a costly exercise for it to try and raise money across financial markets (bank fees, credit rating fees, higher interest rate as no one knows who you are, marketing to investors etc.) There may also be insufficient demand to purchase the debt of a small company and due to the lower amounts involved, may be cost prohibitive to an investment bank.

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THanks to you aswell, guess it was a dumb question.. But the way i was looking at it was like 2 big companies, didn't put small companies in to the equation but yeh i get it now.. Credibility and risk
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sky-blue
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(Original post by AdeptDz)
THanks to you aswell, guess it was a dumb question.. But the way i was looking at it was like 2 big companies, didn't put small companies in to the equation but yeh i get it now.. Credibility and risk
For large companies, if they need a small amount of debt, e.g. $10m. They are more likely to get bank debt (loan) and are not going to issue a bond, its expensive due to marketing, meeting sec requirements, fees to bank are higher, also the market won't be liquid enough.

When in the short term you need to meet working capital requirements you won't issue a bond you will draw on a revolver (loan).

Non investment grade large companies, e.g an LBO candidate, a loan is the cheapest form of financing.

Loans are more flexible, and terms can often be re-negotiated if needed, bonds cannot.

Bonds lock in interest rates. Bank debt for large companies are often variable, linked to a rate such as libor or the base rate. Long term this can be a good/bad thing, e.g. if rates fall you would be better off with a loan. You can pay off the bullet maturity on a bond earlier if rates did fall, however you would have to pay the par value plus a certain fraction of the coupon (%) (callable premium).
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gr8wizard10
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(Original post by sky-blue)
For large companies, if they need a small amount of debt, e.g. $10m. They are more likely to get bank debt (loan) and are not going to issue a bond, its expensive due to marketing, meeting sec requirements, fees to bank are higher, also the market won't be liquid enough.

When in the short term you need to meet working capital requirements you won't issue a bond you will draw on a revolver (loan).

Non investment grade large companies, e.g an LBO candidate, a loan is the cheapest form of financing.

Loans are more flexible, and terms can often be re-negotiated if needed, bonds cannot.

Bonds lock in interest rates. Bank debt for large companies are often variable, linked to a rate such as libor or the base rate. Long term this can be a good/bad thing, e.g. if rates fall you would be better off with a loan. You can pay off the bullet maturity on a bond earlier if rates did fall, however you would have to pay the par value plus a certain fraction of the coupon (%) (callable premium).
damn son, what do you do?

what are the covenant stuctures generally on the different types of debt?
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sky-blue
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(Original post by gr8wizard10)
damn son, what do you do?

what are the covenant stuctures generally on the different types of debt?
hey hahaha, I'm trying to remain anonymous on here but i first made contact with you on May 3rd, regarding your linkedin heading, barl.........

btw thanks for the document you sent me over the summer, I've utilised it, took alot of structural points out of it and it's definitely helped me out alot

congrats again on your FT offer, must of been a great feeling when you got the good news!!
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