Bond repurchase: when and why to do it
The goal of corporate governance is to achieve a reasonable balance of interests between business owners and company management. When there is not enough capital to develop a business, a decision is made to issue bonds, which are essentially debt receipts. And if the company is developing rapidly and does not want to pay extra interest on loans, it can buy-back – the repurchase of its own subordinated convertible bonds.
Experienced managers take such a step, soberly assessing all the benefits and risks, given the financial situation of the company. Sometimes this means the purchase of the enterprise by the administration, since the council will have a large part of the capital.
How to deal with excess liquidity
Liquidity implies the mobile ability of assets to be sold quickly at market value (or close to it). This criterion is the cornerstone of entrepreneurial existence. It is an indicator of the stable financial condition of the company, and this is a decisive competitive factor.
But sometimes liquidity becomes redundant, then buy-back happens. Redemption of bonds is needed in order to:
- Make a profit by saving interest payments;
- Change the balance of capital between the owner and the board;
- Direct the additional funds received to the development of innovations;
- Get additional finances for maneuver;
- Avoid financial insolvency and the risk of being absorbed by another company.
The leaders of successful companies constantly monitor the level of liquidity of enterprises, timely make adjustments to their development strategy.
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