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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 highe
by fallingfrog 8y 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 8y agoOnly 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 8y agoWell 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 8y agoIf 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 8y agoThat 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.