Seasoned Issue: Meaning, Benefits, Examples
What Is a Seasoned Issue?
- Definition: Additional securities issued by an established company already trading in the secondary market.
- Also known as:
- Seasoned Equity Offering
- Follow-On Public Offering (FPO)
- Includes new shares by blue-chip companies and outstanding bonds.
Key Takeaways
- Used by publicly traded companies to raise money, often for debt reduction or funding new projects.
- Dilutive Effect: Increases total shares, potentially reducing existing shareholders' value.
- Non-Dilutive: When existing shareholders sell part of their holdings, not increasing total shares.
- Market Impact: Can cause share prices to fall due to perceived financial issues.
How a Seasoned Issue Works
- Handled by equity underwriters (investment banks).
- Prices based on current market value of outstanding shares.
- Different from an Initial Public Offering (IPO):
- IPO: First time a company offers shares to the public.
- Seasoned Issue: Additional shares from already public companies.
Types of Seasoned Issues
Dilutive Seasoned Issues
- Involves issuing new shares, diluting current shareholders' equity.
- Risks: May negatively impact share value as investors sell off.
- Protection: Subscription rights offer existing shareholders a chance to buy shares at a discount.
Non-Dilutive Seasoned Issues
- Does not create additional shares.
- Often involves founders or venture capitalists selling shares, especially after "lock-up" periods post-IPO.
Criticism of Seasoned Issues
- Seen as a sign of financial distress, possibly leading to a negative investor sentiment.
- Large share sales can pressure stock prices down, especially in thin markets.
- Investors advised to assess overall company financial health.
Examples of a Seasoned Issue
- Company ABC: Issues new shares to fund a new factory, example of a dilutive issue.
- Private Investor: Sells a large block of shares, receiving proceeds without diluting the stock, example of a non-dilutive issue.
This summary covers the essential aspects of seasoned issues, from their definition and operation to types and criticisms. It includes examples to illustrate dilutive and non-dilutive effects and highlights the importance of understanding the financial context of offerings.