As a result of plunging stock markets, floating shares on the stock exchange is no longer the obvious hassle-free route to raise cash. Companies in the US have found a more efficient way of generating funds by issuing convertible bonds.
And the trend is beginning to catch on in the UK. A few corporations, including FTSE-100 companies 3i, Scottish Power and Cable and Wireless, have followed suit.
Scottish Power issued bonds in mid-June to raise cash for research into new ways of generating energy, including expanding its network and wind farms – a development likely to accelerate in the wake of government support this week. After preliminary inquiries into the demand for bonds, the company launched a $575m (£343m) convertible bond.
Bonds are effectively IOUs written by a company that can be traded on the stock market. The convertible variety allows the buyer to convert them to shares at a later stage, according to a prearranged formula.
The issue ended up raising $700m (£420m), almost $200m more than expected, because the issue was over-subscribed. At the time, shares rose 2p to 372p, showing shareholders were pleased with the transaction.
Scottish Power FD David Nish said: ‘The convertible bond market currently provides long-term financing on attractive terms. It will be accounted for on the balance sheet as debt, but has many of the characteristics of equity.’
The bonds were issued with a share price target of 460p, meaning investors who bought them can sell when the stocks reach that level. The allocation is effectively of 90 million Scottish Power shares, 5% of its total share capital. The offering raised more money than Scottish Power expected, at a relatively low cost, and provided it with a healthy balance sheet.
With low interest rates and the good demand there is for this type of financing, the new trend is expected to catch on with other UK companies.
The move comes in response to the difficulties companies are experiencing in raising money for expansion and R&D, because of the weak economic climate.
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