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Junk-Bond Sellers Desperate for Funding Swallow Yields over 10%

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Re: Junk-Bond Sellers Desperate for Funding Swallow Yields over 10%

#41

Post by bluGill »

echelon wrote: post #2

Companies were over-leveraged and didn't have cash stockpiles. They're trying to get liquid cash so they don't have to divest of assets in a market that isn't buying or go into chapter 11. All the same, people are willing to extend loans because they are long on the economy, recovery, and return to normalcy. The engines are starting again. The biggest issue was that companies were over-leveraged with debt. Maybe we'l…

That depends, more prudent companies will have cash on hand (and good credit to borrow more) to buy the less prudent companies at fire sale prices.

A bailout rewards the less prudent companies at the expense of the more prudent ones who cannot take advantage of their junk competition.

Re: Junk-Bond Sellers Desperate for Funding Swallow Yields over 10%

#42

Post by mrep »

TheAdamist wrote: post #29
MR4D wrote: post #26

Earlier quoted context omitted.

Hertz is on the verge of bankruptcy so it only follows that the risk premium for Avis is high. Just think - if nobody is flying, who is renting all those cars?

No one, they dont even have enough parking for them to all be idle simultaneously. The airport rental agencies near me have been renting out all the stadium parking nearby to use as overflow storage.

Yeah, I saw on reddit last month a possible insurance scam in which 3500 rental cars caught fire in an overflow parking lot in florida because they are all sitting around unused [0].

[0]: https://www.cnn.com/2020/04/05/us/airport-fires-cars-trnd/in...

Re: Junk-Bond Sellers Desperate for Funding Swallow Yields over 10%

#43

Post by PeterisP »

zdkl wrote: post #8
marvin wrote: post #7

Earlier quoted context omitted.

Why do you consider that unreasonable, when the free-market option is bankruptcy? They got to keep 5%, rather than 0! The terms of the emergency loan was a certain debt:equity ratio, so in order to qualify, their very high debt load had to be reduced. This could be accomplished in any way the company desired, and it turned out that the only viable pathway was to allow bondholders to convert their loans to new shares…

I wonder why this mechanism (converting potentially derelict bonds into equity) isn't more widespread. In cases where the underlying company reasonably could be expected to continue operating were its debt ratio lowered, apart from legitimate resistance of bondholders expecting debt+interest payments why wouldn't this outcome be preferred to bankruptcy?

IF "the underlying company reasonably could be expected to continue operating were its debt ratio lowered". That's always debatable, and even moreso in the current economic circumstances - I would not be certain that some airline will be able to return to profitability any time soon.

It makes all sense that a bondholder may calculate that liquidating the company and selling off the assets will allow them to recover more of that debt than having the company continue operating. If so, bankruptcy is preferrable - and if others disagree and believe that the company will be profitable, the bankruptcy process allows various ways that essentially allow the "believers" to gather funding to pay off/buy out "unbelievers".

Re: Junk-Bond Sellers Desperate for Funding Swallow Yields over 10%

#44

Post by PeterisP »

dforrestwilson wrote: post #32
echelon wrote: post #2

Companies were over-leveraged and didn't have cash stockpiles. They're trying to get liquid cash so they don't have to divest of assets in a market that isn't buying or go into chapter 11. All the same, people are willing to extend loans because they are long on the economy, recovery, and return to normalcy. The engines are starting again. The biggest issue was that companies were over-leveraged with debt. Maybe we'l…

Taxing interest on corporate debt should be a DNC agenda item.

If you're lending money for interest, then the interest is taxable income just as any other revenue. What do you propose should be changed?

Re: Junk-Bond Sellers Desperate for Funding Swallow Yields over 10%

#46

Post by alexpetralia »

gwd wrote: post #33
alexpetralia wrote: post #30

Earlier quoted context omitted.

To play devil's advocate, how are companies over-leveraged during an environment of such low interest rates? Companies will optimize their capital structure for the lowest cost of capital, and if the cost of debt decreases, companies should rationally leverage accordingly. That's why we see Apple issuing $8B of debt (at ~135bps over 30 year Treasury bonds!) despite having over $200B of cash on hand. If your hurdle ra…

GP said "leveraged and didn't have cash stockpiles ". Your example of Apple may fit the first criteria, but not the second. And this is exactly why you should have a cash stockpile, either as a company or an individual: You can never tell when a random event will completely wipe out your earnings for 6 months. I'm no corporate financier, but I've certainly heard arguments in favor of borrowing money during times of l…

Yes, I agree with you. I am sure shareholders saw piles of cash and demanded: "better in our pocket than yours." (Carl Icahn famously tried this with Apple.)

Re: Junk-Bond Sellers Desperate for Funding Swallow Yields over 10%

#47

Post by IgorPartola »

PeterisP wrote: post #44
dforrestwilson wrote: post #32

Earlier quoted context omitted.

Taxing interest on corporate debt should be a DNC agenda item.

If you're lending money for interest, then the interest is taxable income just as any other revenue. What do you propose should be changed?

You are misunderstanding. The GP is not talking about you lending money, but about you borrowing it. As it stands if you borrow $1m and pay $50k in interest as you pay back the loan, that $50k is considered a business expense and reduces your tax liability.

Re: Junk-Bond Sellers Desperate for Funding Swallow Yields over 10%

#48

Post by H8crilA »

sokoloff wrote: post #37

In the 80s, we were borrowing money for mortgages (secured by houses with tenants and 20% downpayments) at rates over 15%. I don’t find yields over 10% given the current economic climate to be unreasonable or evidence of “desperation” on the part of sellers. I would probably find rates of under 10% as evidence of desperation on the part of buyers...

Well, the economy is deflating fast, which means the riskfree rate is in the toilet. The current 10% is equivalent to closer to 30%-35% in the early 80s.

The fact that the economy is "pretty bad" doesn't necessarily imply that all rates should be low or high. They can be either very high (inflation) or very low (deflation), and both are not good signs.

Re: Junk-Bond Sellers Desperate for Funding Swallow Yields over 10%

#49

Post by code4tee »

alexpetralia wrote: post #30
echelon wrote: post #2

Companies were over-leveraged and didn't have cash stockpiles. They're trying to get liquid cash so they don't have to divest of assets in a market that isn't buying or go into chapter 11. All the same, people are willing to extend loans because they are long on the economy, recovery, and return to normalcy. The engines are starting again. The biggest issue was that companies were over-leveraged with debt. Maybe we'l…

To play devil's advocate, how are companies over-leveraged during an environment of such low interest rates? Companies will optimize their capital structure for the lowest cost of capital, and if the cost of debt decreases, companies should rationally leverage accordingly. That's why we see Apple issuing $8B of debt (at ~135bps over 30 year Treasury bonds!) despite having over $200B of cash on hand. If your hurdle ra…

Apple’s move is more about tax optimization. Yes they have all this cash but it’s sitting in accounts all around the globe. They’d have to pay hefty taxes to repatriate it and then pay it out as dividends. It’s “cheaper” for them and better for shareholders to take out a loan (bond) in the US and then take that cash and give it to shareholders than it is to bring the money from around the world into the US and pay it to shareholders.

This is why Apple keeps asking for a “tax holiday” to bring all this money back home to the US.

Re: Junk-Bond Sellers Desperate for Funding Swallow Yields over 10%

#50

Post by cat199 »

gwd wrote: post #33
alexpetralia wrote: post #30

Earlier quoted context omitted.

To play devil's advocate, how are companies over-leveraged during an environment of such low interest rates? Companies will optimize their capital structure for the lowest cost of capital, and if the cost of debt decreases, companies should rationally leverage accordingly. That's why we see Apple issuing $8B of debt (at ~135bps over 30 year Treasury bonds!) despite having over $200B of cash on hand. If your hurdle ra…

GP said "leveraged and didn't have cash stockpiles ". Your example of Apple may fit the first criteria, but not the second. And this is exactly why you should have a cash stockpile, either as a company or an individual: You can never tell when a random event will completely wipe out your earnings for 6 months. I'm no corporate financier, but I've certainly heard arguments in favor of borrowing money during times of l…

> But borrowing to do stock bybacks when you don't have a stockpile is just skating further out onto thinner and thinner ice.

this also partly depends on your expectation on the availability to resell the stocks later on if desired

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