3 ms·

They are the owners of the company. The leverage is just a technique to move future cashflows in to the present so they can pay their investors and move on to t

by hendzen 10y ago

They are the owners of the company. The leverage is just a technique to move future cashflows in to the present so they can pay their investors and move on to the next company. Would it be better to just allow the company to go completely out of business?

Retric 10y ago
If the owners want to realize those future cash flows they can sell. Leverage unlike sale forces otherwise healthy companies into bankruptcy. The advantage is you can leverage more than the value of a company and then extract it without selling. PS: Remember you can profit from preforming a useful economic function, or fraud making profit a poor yardstick for anything else.
- hendzen 10y ago
  If you truly believe this leverage will force the company in to bankruptcy, you should short Hostess stock (TWNK). It's currently trading at ~$12.50 per share. Furthermore, if you believe it is possible to save a distressed company like Hostess and generate superior returns without dividend recapitalization, perhaps you should start a competing private equity firm.
  - Retric 10y ago
    I am keeping an eye on them and considering put options. I am expecting a peak and crash within five years, but timing these things is risky.
    - msandford 10y ago
      The market can act irrationally longer than you can stay solvent. Put options are "safer" than shorting but they cost more.
- lambertsimnel 10y ago
  While I'm familiar with the idea that healthy companies can be so leveraged for quick profits that they go out of business, I don't understand the mechanism. Is the idea that such over-leveraged companies cease to be otherwise healthy before they go out of business? If so, why? Is the management worse while they are over-leveraged? Is it a matter of market conditions worsening? Why would an otherwise healthy company be liquidated if it couldn't service its debt? Wouldn't lenders rather sell the company as a profitable going concern than accept what's left after liquidating it? A reasonable valuation for a genuinely healthy company would be greater than book value. I'm also confused about the practice of backs selling repossessed buy-to-let homes during a crash, evicting tenants in the process. Why sell low, rather than continue to collect the rent?
  - Retric 10y ago
    Profits fluctuate. If a company generates -1 to 10 billion per year and has 2 billion cash on hand and assets worth 5 billion, they can handle several bad years and will tend to be profitable and very stable. If someone then says they can probably make debt payments of 5 billion a year then they might be able to do that for a while, but it will eventually cause them to fail. The important consideration is you have already made back your investment at this point so the owners don't care. In fact if the company fails that suggests you succeeded in extracting more money than it was worth.
    - lambertsimnel 10y ago
      I thoroughly agree with your 1st & 3rd paragraphs, but the situation described in your 2nd paragraph sounds like one in which the lenders are irresponsible, whereas the owners of the borrower alone seem to usually be blamed.
      - Retric 10y ago
        The second paragraph was exaggerated for effect. However, companies are not limited to bank loans, so it may be the bond market taking on these risks. Further, there is an information asymmetry with loans so a company may be cyclical in nature yet look really good over the last five+ years.

by hendzen 10y ago

Retric 10y ago

If the owners want to realize those future cash flows they can sell. Leverage unlike sale forces otherwise healthy companies into bankruptcy. The advantage is you can leverage more than the value of a company and then extract it without selling. PS: Remember you can profit from preforming a useful economic function, or fraud making profit a poor yardstick for anything else.

hendzen 10y ago
If you truly believe this leverage will force the company in to bankruptcy, you should short Hostess stock (TWNK). It's currently trading at ~$12.50 per share. Furthermore, if you believe it is possible to save a distressed company like Hostess and generate superior returns without dividend recapitalization, perhaps you should start a competing private equity firm.
- Retric 10y ago
  I am keeping an eye on them and considering put options. I am expecting a peak and crash within five years, but timing these things is risky.
  - msandford 10y ago
    The market can act irrationally longer than you can stay solvent. Put options are "safer" than shorting but they cost more.
lambertsimnel 10y ago
While I'm familiar with the idea that healthy companies can be so leveraged for quick profits that they go out of business, I don't understand the mechanism. Is the idea that such over-leveraged companies cease to be otherwise healthy before they go out of business? If so, why? Is the management worse while they are over-leveraged? Is it a matter of market conditions worsening? Why would an otherwise healthy company be liquidated if it couldn't service its debt? Wouldn't lenders rather sell the company as a profitable going concern than accept what's left after liquidating it? A reasonable valuation for a genuinely healthy company would be greater than book value. I'm also confused about the practice of backs selling repossessed buy-to-let homes during a crash, evicting tenants in the process. Why sell low, rather than continue to collect the rent?
- Retric 10y ago
  Profits fluctuate. If a company generates -1 to 10 billion per year and has 2 billion cash on hand and assets worth 5 billion, they can handle several bad years and will tend to be profitable and very stable. If someone then says they can probably make debt payments of 5 billion a year then they might be able to do that for a while, but it will eventually cause them to fail. The important consideration is you have already made back your investment at this point so the owners don't care. In fact if the company fails that suggests you succeeded in extracting more money than it was worth.
  - lambertsimnel 10y ago
    I thoroughly agree with your 1st & 3rd paragraphs, but the situation described in your 2nd paragraph sounds like one in which the lenders are irresponsible, whereas the owners of the borrower alone seem to usually be blamed.
    - Retric 10y ago
      The second paragraph was exaggerated for effect. However, companies are not limited to bank loans, so it may be the bond market taking on these risks. Further, there is an information asymmetry with loans so a company may be cyclical in nature yet look really good over the last five+ years.