RE: huh?22 Oct 2014 17:52
hi införthelonghaul.
when companies need to raise money to develop their businesses.
they can do that primarily through either (a) equity ( = shares), or (b) debt (= loans, bonds)
.. with equity, those who lend the company money do so in exchange for a share
in the potential profits ..... so they are given 'shares' in the company.
if the company does extremely well, then the shareholders will gain a lot.
but if the company does badly, there are no profits to share so they get nothing.
... with debt, those who lend the company money, for example by agreeing to subscribe
for bonds with have a maturity of a few years, with a certain interest coupon per year,
they *don't* actually get a share of the future profits,
so they won't do that well if the company does brilliantly.
instead, they have simply asked for a certain rate of interest to be paid back,
in addition to repaying the loan amount.
-- so debt funders are looking for less ambitious returns,
but in exchange, they expect to be more shielded
from the worst losses if things go badly.
- so if a company fails and goes broke, some people will get paid their money back first,
while others have to go to the back of the queue to wait, and will get nothing if the money from
the sale of the company's assets runs out before it gets to their turn.
because those who lent money (debt financing, e.g. bank loans, bondholders)
didn't ask for a large positive return if things went well,
the flip side of that is they do expect to get paid back first if the company fails.
by contrast, equity holders (who owned 'shares') asked for a big return if the company succeeds,
but have to settle for ** last ** place in the queue if the company fails.
i.e the shareholders were greedy for bigger rewards, but pay for that by taking bigger risks.
in the case of LOND, the company does indeed have assets which are worth some money,
but when these are sold off, in the first instance the money is used to pay back
people who simply lent the company money, in exchange for a certain interest rate.
only ** IF ** there is anything left after that, then they would start to pay back to the shareholders,
but sadly in practice with Lond, the loans were so high,
that there will be nothing to pay back the shareholders.
so in essence, yes the shareholders do own the company,
but those who own debt *also* own the company,
and have a *higher priority* to be paid back when it all goes wrong.
(NB sometimes, certain categories of debt have priority over others...
'senior' debt holders are those who will be paid back first, if funds are limited,
in preference to both junior debt-holders and share-holders.)
bottom line, share holders stand to lose more than those who simply lend money.