Question

From an ongoing perspective (once issued), which is more (possibly) dangerous to a company? A Bond or Stock? Why? Give specific examples both from a legal and cost of money and liquidity perspective to substantiate your opinion....

Answer 1

Once the bond is issued or the stock is issued there is normally more danger with the bond because with the issue of equity the company is not obligated to pay dividend each year or each half year or each quarter but that is not the case with the bond issue. There is obligation to pay the periodic cash flow on the debt and not able to meet that obligation would create bankruptcy scenario. So definitely the bond issue is more dangerous, Let’s take the example of the current scenario of the global pandemic, because of the pandemic and the lockdown many businesses were facing revenue crunch and this situation is expected to continue for some time, despite the intervention by the central bank and the assurances by the federal government the economy does not seem to be doing well and in this scenario if a company has a large bond debt outstanding and it has to pay interest payment, the company might not be able to pay it and the creditors might take legal action against the company including filing for bankruptcy. Because of the downturn in the market company might not be able to raise funds by issuing equity because it would face liquidity issue, investors are wary at this time. But this situation of interest obligation would not have arisen if the company had issued equity instead of debt. There is no fixed obligation to pay dividend to equity shareholders.