6 - Bank loans and securitization

Abstract

This chapter presents a discussion on bank loans and securitization. Companies that need to raise money has three alternatives: (1) issue bonds (including convertible bonds), (2) issue equity, or (3) take a bank loan. Both bank loans and the issuance of debt securities have associated fixed costs. In the case of loans, the costs faced by the credit institution—which will be eventually paid by the borrower—include client rating, analysis of several years of financial statements, and examination of the prospects of the project or operation to be financed. In connection to bond issuance, the costs are those of study of the prospects of a capital market offering, preparation of the term sheet and prospectus, as well as a road show presentation for institutional investors. A significant cost is the fees of the investment bank that acts as consultant and/or as underwriter. Because capital markets are more efficient than commercial banks, the way to bet is that bond issuance will be a more effective alternative. Financing via the bond market has prerequisites associated to rules established by regulators as well as requirements imposed by the market so that an offering of debt instruments attracts the investors' attention. Companies contemplating a bond offering must appreciate that this has associated to it issuance procedures.