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Interest rate risk isn't a huge deal for issuers when rates are this low - not much room for rates to fall. And even if it did become significant, the futures m

Interest rate risk isn't a huge deal for issuers when rates are this low - not much room for rates to fall. And even if it did become significant, the futures market has very effective tools for hedging various kinds of interest rate risk. >Additionally, don’t you think it’s true that companies are issuing debt to buy back their own stock, which they then intentionally overpay for in order to drive up the stock price? Stock buybacks are replacing dividends for tax reasons - they both make the overall value of publicly traded shares lower by giving cash to shareholders. Dividends trigger income tax by replacing share price with cash in hand, while buybacks reduce the publicly traded float at the same price and only triggers capital gains for the shareholders who wish to sell into the buyback.

fallingfrog 7y ago
I was more referring to the risk of interest rates going up- would that not mean that the debt has to be either repaid or rolled over into a new loan at a higher rate, when it matures? What if the fed raises rates like it did during the volker shock- if you owe a lot of cash and the rates go that high, does your company not become insolvent?
- reallydude 7y ago
  Only if the rates are adjustable. I'm not sure how common a financial advisor for a company would ok that, but I'll guess...almost never.
  - fallingfrog 7y ago
    Well they don’t have to be adjustable though right? I mean it doesn’t feel like this is debt that is ultimately being paid off, but rather just rolled over into new loans, on some schedule right? So when you roll it over, you might have to do so at a higher rate. I mean I’m not seeing companies go, ok we’re going to swap debt for equity here but then we’re going to pay all this debt off. The debt is permanent.
- ThrustVectoring 7y ago
  If you've issued long-term bonds and rates go up, you can buy back your own bonds below par and earn a profit (depending on rate movements etc). And when it matures, you can likely issue more stock if the cash flow situation of your company hasn't changed. The only route for insolvency is if you've used debt issuance to pull more cash out of the company than the actual equity slice should have been worth.
  - fallingfrog 7y ago
    That makes sense, but my guess is unfortunately that that is exactly what companies are doing, mostly because the ceo gets a sizable bonus when the stock price goes up.
im3w1l 7y ago
How do stock buybacks work for companies that are net diluting? I.e. a company pays employees with 2n stock units and buys back n stock units. Is that akin to a ponzi?
- fallingfrog 7y ago
  I would say that that’s exactly what’s happening. You pay employees with stock, but then you buy back your stock to inflate the price, financing the buybacks with debt. The ceo gets a huge bonus, and then when the stock price crashes because the debt has to be repaid, the employees are left with a big pile of worthless stocks. The ceo flees with a golden parachute.

fallingfrog 7y ago

I was more referring to the risk of interest rates going up- would that not mean that the debt has to be either repaid or rolled over into a new loan at a higher rate, when it matures? What if the fed raises rates like it did during the volker shock- if you owe a lot of cash and the rates go that high, does your company not become insolvent?

reallydude 7y ago
Only if the rates are adjustable. I'm not sure how common a financial advisor for a company would ok that, but I'll guess...almost never.
- fallingfrog 7y ago
  Well they don’t have to be adjustable though right? I mean it doesn’t feel like this is debt that is ultimately being paid off, but rather just rolled over into new loans, on some schedule right? So when you roll it over, you might have to do so at a higher rate. I mean I’m not seeing companies go, ok we’re going to swap debt for equity here but then we’re going to pay all this debt off. The debt is permanent.
ThrustVectoring 7y ago
If you've issued long-term bonds and rates go up, you can buy back your own bonds below par and earn a profit (depending on rate movements etc). And when it matures, you can likely issue more stock if the cash flow situation of your company hasn't changed. The only route for insolvency is if you've used debt issuance to pull more cash out of the company than the actual equity slice should have been worth.
- fallingfrog 7y ago
  That makes sense, but my guess is unfortunately that that is exactly what companies are doing, mostly because the ceo gets a sizable bonus when the stock price goes up.

im3w1l 7y ago

How do stock buybacks work for companies that are net diluting? I.e. a company pays employees with 2n stock units and buys back n stock units. Is that akin to a ponzi?

fallingfrog 7y ago
I would say that that’s exactly what’s happening. You pay employees with stock, but then you buy back your stock to inflate the price, financing the buybacks with debt. The ceo gets a huge bonus, and then when the stock price crashes because the debt has to be repaid, the employees are left with a big pile of worthless stocks. The ceo flees with a golden parachute.