What is debt capital?
Debt capital is capital, usually cash, raised by issuing bonds. While most of the time the capital raised is cash, it can also be other valuables. The capital raised must be returned to the debtor. Both private companies and governments can raise debt capital in this way.
To raise capital, companies have several different options. Obviously, the goal of most companies is to sell a product or service for profit. However, some may need or want to raise money faster than the normal course of buying and selling will provide. To do this, they can consider debt capital.
In some ways, debt capital can be more attractive to a company than another way of raising money, such as issuing additional shares. Companies may not want to issue more shares because that would dilute ownership of existing shares. Issuing more shares also runs the risk of lowering the share price depending on how much is issued.
Investors may also find it an attractive option to provide debt capital by purchasing bonds. While the option does not offer an equity stake in the company, it does offer a little more security than shares. Bonus payments take precedence over dividend payments, which are received by shareholders. If the company only earns enough money to cover its debt capital obligations, it is the shareholders who receive no payment. As with most other forms of debt, bonds are repaid with interest.
Debt capital is typically raised by issuing bonds, although other options also exist. Businesses can also borrow from banks, which is a popular option for many small businesses. However, most larger companies see bonds as a more popular option for a variety of reasons.
In some cases, debt principal can be used to pay off debt principal that is already outstanding by issuing more bonds to pay off the first set of bonds. This is called "calling the titles". This usually means that the original bonds issued are paid off before the term expires. Companies, or governments, may choose to do this because interest rates are better at some other point in the life of the bonds.
Debt principal is typically issued after consultation with a securities attorney, who determines several different factors, including how best to sell the securities. Securities can be sold through negotiation with an underwriter or through a bidding process. In some cases, especially for governments, bonds can only be issued for certain projects. Securities attorneys will inform government administrators of all legal matters.