The largest and most well-known “stock offering” is during the IPO, when companies obtain the necessary capital for financing through the issue of shares. However, sometimes the company may issue new shares (Secondary Offering) and offers them to institutional investors. This type of “offering” differs significantly from the IPO and does not need to go through the whole process. Secondary Offering is usually harmful to the value of the stock.
However, the so-called “Bond offering” occurs when the company issues debt securities (bonds), which obtain additional capital. It always depends on the situation and how the company wants to use the money for. Even if the stock is in trouble, the bond offering can also negatively affect its value as it increases its liabilities.
The issue of additional bonds and their placement on the market increases their total stock and causes an increase in yields and a decrease in the prices of the bond and others. In other words, the company must provide a higher return to investors to be willing to buy the bond. Although the RBA offers a beautiful example in a slight different context but it can also be applied here. As the yield curve increases after the issue, the bond price will fall. This effect may also hurts stocks. The RBA mentions in the line below a detailed explanation of bonds and the impact of monetary policy on the yield curve.
Source: Bonds and the Yield Curve | Explainer | Education | RBA
It must be said that stocks do not always react negatively to the issue of bonds. I will give an example where in 2020, “shipping companies” (“party ships”) issued new bonds. As the industry has been hit hard by lockdowns, a ban on shipping caused by the COVID-19 pandemic, the bond issue has put an even greater strain on the liabilities side of the balance sheet, which has had a negative impact on their shares in the short term. On the other hand, it helped the company manage the liquidity situation.
If e.g., Apple issues new bonds, it can’t be certainly considered such a problem here. On the contrary, investors know that Apple has solid and healthy balance sheet, so the new issue will not harm them in any way, and the share price will not be under such pressure.
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