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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%

#61

Post by SilasX »

cat199 wrote: post #50
gwd wrote: post #33

Earlier quoted context omitted.

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

If you're creating the cash buffer as a way to stay afloat during hard times, that's a bad strategy, since the market for shares (including yours) will be weak precisely when you need the cash.

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

#62

Post by drumhead »

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?

The banks or debt holders dont necessarily want to become shareholders. It the most junior type of debt, and they're reliant on the company recovering, which may not happen. They could be left holding shares for years before it makes a return.

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

#64

Post by LatteLazy »

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...

If the fed rate is 15% and you have to pay 17%, you're a (sub) 2% risk. If the fed rate is zero, and you pay 10%, you're a much bigger risk...

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

#65

Post by mrep »

snidane wrote: post #52
bald wrote: post #38

Earlier quoted context omitted.

In order to draw a conclusion, we should look at the _real_ interest rate vs. the nominal one.

Real interest rate depends on inflation which is an invented phenomenon of the 20th century. Inflation wasn't relevant in the preceding century and might not be relevant in 21st century either. At least not in the current form it is measure as a CPI while ignoring asset price inflation in real estate and stock markets. Whether that is a bug or feature remains to be seen, but for most people a psychological effect of…

> while ignoring asset price inflation in real estate and stock markets.

Do you have any data to back this up? Some quick math shows annualized S&P 500 Return with dividends reinvested from april 2010 to april 2020 are 9.694% [0] which is entirely in line with historical returns [1]. Housing price per square foot hasn't really changed for most people either [2].

[0]: https://dqydj.com/sp-500-return-calculator/

[1]: https://en.wikipedia.org/wiki/S%26P_500_Index#Performance

[2]: https://www.supermoney.com/inflation-adjusted-home-prices/

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

#66

Post by rndmwlk »

adwi wrote: post #53
H8crilA wrote: post #48

Earlier quoted context omitted.

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.

> The current 10% is equivalent to closer to 30%-35% in the early 80s. Could you explain this more?

I don't know about the 30%-35% number exactly, but the idea they're getting at is what is the "real" interest rate. Interest rates are all relative. If you can take a loan out at a 15% interest rate is that bad? Well if a bank is offering you a savings rate of 20% - congratulations you just made a lot of money.

https://fred.stlouisfed.org/series/TB3MS

Take a look at the T-bill rates in the 80s. To straight-faced say "I'm not concerned about these rates," and make a comparison to interest rates in the 80s is ignorant at best. There was an intentional effort by the government to raise rates in order to fight inflation. We are so far removed from the interest rate environment of the 80s...

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

#67

Post by firebird84 »

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?

In the US creditors have liquidation preference in bankruptcy. You give that up if you convert to shares but gain some measure of control if the company is still solvent. It's a tradeoff I'm guessing. It's possible they have more to gain in bankruptcy in certain cases.

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

#68

Post by snarf21 »

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…

Nah, the Fed will bail them out. They are already holding a lot of corporate bond indexes and more will follow. We have a system now where companies were borrowing money at 0% to do buybacks to keep executive compensation rolling. This is one change that must happen. C-suite, VPs and board members should not be allowed to receive compensation based on stock price. It creates a perverse incentive. They should be building strong companies that allow them to stay employed. Give them bonuses based on growth or profits or whatever, just not stock price.

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

#69

Post by jeffdavis »

Curious how all of these crazy interest movements will affect the housing market. Deflation sounds bad for housing values, but then again, it means interest rates will stay low, propping up values. And then there's the generally-crazy bay area market.

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

#70

Post by johnrgrace »

Traster wrote: post #4
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…

Don't these yields suggest that people actually aren't willing to extend the loans which is why the yields are spiking. Double digit yields in a deflationary economy should indicate that these loans are being made with a high expectation of default.

It's loan to own! I did high yield Oil & Gas investment banking in the late 90's and a lot of investors had the thinking - Heads I get 12%, Tails I wind up owning a good chunk of the equity and the firm has limited debit.
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