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These are the current going rates for junk bonds. There's nothing surprising about that. And yes, pretty sure that Airbnb does not deserve investment grade - I

These are the current going rates for junk bonds. There's nothing surprising about that. And yes, pretty sure that Airbnb does not deserve investment grade - I haven't seen their books but those that have and laid money for this loan clearly think it's a junk bond. Startups generally should not deserve investment grade, and generally should not raise debt at all if possible. What are you going to pay the interest with, your negative profits? You're a growing company, go raise equity. https://fred.stlouisfed.org/series/BAMLH0A0HYM2EY https://fred.stlouisfed.org/series/BAMLH0A0HYM2EY BTW, junk bonds can be pretty solid investments. $HYG for the ETFs era (beware: it has decent energy exposure).

ta1234567890 7y ago
> generally shouldn't raise debt, what are you going to pay the interest with, your negative profits? You should be raising equity. And that's the reason why the SBA loans that are part of the stimulus package are not going to save the small businesses they are supposed to be saving. Anyways, I can relate. I raised money through convertible notes instead of equity, because reasons. Then when we didn't do a valued round soon enough (2 years expiration), one of the investors called his note, sued, forced us into bankruptcy, bought the assets at auction, and is now suing me and my cofounder personally to repay his note. So, never doing that again. Debt is not a very good financing tool for small businesses that are exposed to a lot of risk (almost all of them right now).
- deleted 7y ago
  [deleted]
- tschwimmer 7y ago
  Please name the investor so we can avoid working with them.
  - deleted 7y ago
    [deleted]
- JoshTriplett 7y ago
  > suing me and my cofounder personally to repay his note On what grounds?
  - H8crilA 7y ago
    If you don't pay interest on tjme you are in "default", and creditors take over the company. Old shares (stocks) are deleted, just like that. A loan is a contractual obligations. This is like the 101 of investing, understanding what the capital structure of a company is. Edit: ignore my comment; didn't realize the debt "leaked" through the corporate capital structure directly to the founders; I agree that investor is probably quite an asshole.
    - JoshTriplett 7y ago
      I was asking on what grounds someone could expect a personal guarantee from individual founders, rather than a guarantee from the business that no longer exists. (Unless the terms of the convertible note are particularly horrific.) (I'm not questioning that an investor via convertible note has the ability to call the note due from the company. The specific sentence quoted in my reply regarded the expectation of personal repayment after the company was driven into bankruptcy.)
      - deleted 7y ago
        [deleted]
      - hogFeast 7y ago
        Two reasons occur: personal guarantee on the note (I have no idea whether this occurs where this person lives...it isn't something I would ever do, no matter the circumstance) or fraudulent conveyance (i.e. the executives start stripping assets when the company goes into BK, afaik this is a civil action that can be brought against executives either by creditors themselves or trustees).
  - smallgovt 7y ago
    Investor must be claiming fraud or gross negligence.
- deleted 7y ago
  [deleted]
- nemo44x 7y ago
  > And that's the reason why the SBA loans that are part of the stimulus package are not going to save the small businesses they are supposed to be saving. I’ve been assuming the best case scenario for them is to slow the death of many of them. Some will hang on for awhile, and the shorter this goes on the better the survival rate.
- avalys 7y ago
  The SBA loans will be FORGIVEN if you spend them on rent and payroll. Please excuse the all caps, but I think it's very important that this be as widely known as possible, so that someone doesn't let their business fail because they weren't aware of how this program works. https://restaurant.org/Articles/News/How-the-CARES-Act-SBA-loan-forgiveness-works https://restaurant.org/Articles/News/How-the-CARES-Act-SBA-l... The program is not perfect and there are restrictions, but if you qualify, this is basically a grant, not a loan. It uses the existing SBA loan infrastructure so that the money can be disbursed very quickly through commercial banks.
  - ta1234567890 7y ago
    > it's very important that this be as widely known as possible, so that someone doesn't let their business fail because they weren't aware of how this program works. Agreed. So let's clarify a few things. For the loan to be forgiven, you first need to be able to get it. From NYTs SBA loans page[1]: > You must apply through a bank or other lender, so start by contacting one you already have a relationship with. Many banks are imposing restrictions and choosing to work only with their existing business customers. > The Treasury Department said the program would start taking applications on April 3, a week after the bill was signed into law. But the department didn’t give lenders necessary technical information until just hours before the program was scheduled to start — and lenders are still waiting for some key guidance and documents, bankers said. Many are still developing their application rules and systems. Most businesses that need the loans have been closed for 2-3 weeks now and it will most likely take at least another 2-3 weeks for them to see any money from those loans in their bank accounts[0,1], if they are lucky enough to qualify. Very few can wait that long before having to close for good. Then, if you are able to get a loan, there are very important limitations to forgiveness (from the link in your comment): > Your forgiveness amount equals your total payroll costs multiplied by the average number of FTE employees you retained for the eight weeks following the date of your loan origination > You must spend at least 75% of your loan on payroll. From another, more recent, article[1]: > The agency said that “not more than 25 percent” of the forgiven amount may be used for nonpayroll costs, like rent. So you only get up to 8 weeks of payroll, from the moment you get the loan (it won't cover anything you already paid), and then at least 75% must be used for payroll. So for example a restaurant, is very unlikely to be able to meet those requirements, because they are barely employing anyone right now, and their biggest expense is their lease, which they won't be able to cover with 25% of the PPP loan that should be used for their payroll. The restaurant would then need another loan to pay the lease, but that's a super risky loan, both for them and for the bank - the bank will probably not approve them and if they did, it would be under very bad terms for the restaurant. Banks are not in the business of losing money. 0: https://money.com/sba-loans-stimulus-ppp-application-requirements/ https://money.com/sba-loans-stimulus-ppp-application-require... 1: https://www.nytimes.com/article/small-business-loans-stimulus-grants-freelancers-coronavirus.html https://www.nytimes.com/article/small-business-loans-stimulu...
quickthrowman 7y ago
To reinforce the warning at the end, the put/call ratio on HYG is currently 12 (!) Lots of money is betting on it falling in price. The Fed is also not buying non-IG bonds (yet) so nobody will be supporting HYG/JNK in the way LQD will be. If they start buying those, HYG will soar. An oil price spike and recovery would help HYG too. To be fair, I did make money on weekly HYG calls today, but that was a hedge ;) 4/9 76C from .50 to 1.18
- deleted 7y ago
  [deleted]
agilebyte 7y ago
For anyone just googling "HYG" and seeing a flat chart (with a dip at the end), use a tool like Portfolio Visualizer to see the effect of bond ETF dividends. Put "HYG" under ticker, set it to 100% and make sure to set Display Income to "Yes". You'll get compound annual growth rate (4.52%) and the inflation adjusted value (2.76%) as well. https://www.portfoliovisualizer.com/backtest-portfolio https://www.portfoliovisualizer.com/backtest-portfolio
- smabie 7y ago
  What a world we live in now that 4.52% is the yield for junk bonds.
  - SilasX 7y ago
    That's not the yield, but the long-term growth rate, accounting for defaults. But yes, for a while 5% was a typical junk bond yield. As of last month, though, it shot up to ~8 percent, or 10 for B-grade. https://news.ycombinator.com/item?id=22817962 https://news.ycombinator.com/item?id=22817962
ThrustVectoring 7y ago
> What are you going to pay the interest with, your negative profits? Capital structure arbitrage means that there's a market for any public company's junk bonds regardless of their balance sheet position. What matters is the likelihood of collapse, as measured by put option pricing. The logic is pretty straightforward. You buy the bond, put options on the common equity, and short the appropriate treasury futures contract. If the company fails to pay the bond as agreed, you get your money back via the put options. If they don't, you collect the excess premium of the junk bonds, minus the cost of delivering the short treasury futures contracts and the premium paid for the put options that are expiring worthless. At no point does the actual creditworthiness of the company matter in this analysis. The arbitrageurs need not care. If the equity market believes that they have a future, they're either right and you get paid back on the junk bonds, or they're wrong and you pick their pocket shorting the company.
- evandijk70 7y ago
  This is clearly not true, because if any company can find a market for their bonds, no company would ever need to go bankrupt. Puts would be prohibitively expensive if the company is likely to go bankrupt.
  - ThrustVectoring 7y ago
    There's a market, there's not a market of unlimited size (or even one large enough to make a meaningful difference to solvency). As one upper limit, if you borrow literally every publicly available share and sell it short, that limits you to hedging bonds up to the total market capitalization of the company.
- lordnacho 7y ago
  What's the sticking point here? What if you have competitors doing the same arb? Seems like it's not a pure guaranteed arb. What parameters are pushed to the margins? I'm an ex derivatives trader so you can go into details.
  - ThrustVectoring 7y ago
SilasX 7y ago
Oh wow, that's a change. But FWIW, I don't think it's very helpful to look at an aggregate like that, which doesn't distinguish between (at least pre-crisis) ratings. For some other datapoints, I would recommend: 1) S&P BB-rated bond index (just below investment grade), which shows a 6.3% yield for that grade. https://fred.stlouisfed.org/series/BAMLH0A1HYBBEY https://fred.stlouisfed.org/series/BAMLH0A1HYBBEY 2) I do see a 10% yield at the B rating: https://fred.stlouisfed.org/series/BAMLH0A2HYBEY https://fred.stlouisfed.org/series/BAMLH0A2HYBEY So that must be what the market is effectively classing Airbnb as. 3) The Vanguard high-yield corporate fund, which shows an 8.1% yield: https://investor.vanguard.com/mutual-funds/profile/overview/vweax https://investor.vanguard.com/mutual-funds/profile/overview/... (Also an aggregate like the high yield index you listed and noisy for that reason.)

ta1234567890 7y ago

> generally shouldn't raise debt, what are you going to pay the interest with, your negative profits? You should be raising equity. And that's the reason why the SBA loans that are part of the stimulus package are not going to save the small businesses they are supposed to be saving. Anyways, I can relate. I raised money through convertible notes instead of equity, because reasons. Then when we didn't do a valued round soon enough (2 years expiration), one of the investors called his note, sued, forced us into bankruptcy, bought the assets at auction, and is now suing me and my cofounder personally to repay his note. So, never doing that again. Debt is not a very good financing tool for small businesses that are exposed to a lot of risk (almost all of them right now).

deleted 7y ago
[deleted]
tschwimmer 7y ago
Please name the investor so we can avoid working with them.
- deleted 7y ago
  [deleted]
JoshTriplett 7y ago
> suing me and my cofounder personally to repay his note On what grounds?
- H8crilA 7y ago
  If you don't pay interest on tjme you are in "default", and creditors take over the company. Old shares (stocks) are deleted, just like that. A loan is a contractual obligations. This is like the 101 of investing, understanding what the capital structure of a company is. Edit: ignore my comment; didn't realize the debt "leaked" through the corporate capital structure directly to the founders; I agree that investor is probably quite an asshole.
  - JoshTriplett 7y ago
    I was asking on what grounds someone could expect a personal guarantee from individual founders, rather than a guarantee from the business that no longer exists. (Unless the terms of the convertible note are particularly horrific.) (I'm not questioning that an investor via convertible note has the ability to call the note due from the company. The specific sentence quoted in my reply regarded the expectation of personal repayment after the company was driven into bankruptcy.)
    - deleted 7y ago
      [deleted]
    - hogFeast 7y ago
      Two reasons occur: personal guarantee on the note (I have no idea whether this occurs where this person lives...it isn't something I would ever do, no matter the circumstance) or fraudulent conveyance (i.e. the executives start stripping assets when the company goes into BK, afaik this is a civil action that can be brought against executives either by creditors themselves or trustees).
- smallgovt 7y ago
  Investor must be claiming fraud or gross negligence.
deleted 7y ago
[deleted]
nemo44x 7y ago
> And that's the reason why the SBA loans that are part of the stimulus package are not going to save the small businesses they are supposed to be saving. I’ve been assuming the best case scenario for them is to slow the death of many of them. Some will hang on for awhile, and the shorter this goes on the better the survival rate.
avalys 7y ago
The SBA loans will be FORGIVEN if you spend them on rent and payroll. Please excuse the all caps, but I think it's very important that this be as widely known as possible, so that someone doesn't let their business fail because they weren't aware of how this program works. https://restaurant.org/Articles/News/How-the-CARES-Act-SBA-loan-forgiveness-works https://restaurant.org/Articles/News/How-the-CARES-Act-SBA-l... The program is not perfect and there are restrictions, but if you qualify, this is basically a grant, not a loan. It uses the existing SBA loan infrastructure so that the money can be disbursed very quickly through commercial banks.
- ta1234567890 7y ago
  > it's very important that this be as widely known as possible, so that someone doesn't let their business fail because they weren't aware of how this program works. Agreed. So let's clarify a few things. For the loan to be forgiven, you first need to be able to get it. From NYTs SBA loans page[1]: > You must apply through a bank or other lender, so start by contacting one you already have a relationship with. Many banks are imposing restrictions and choosing to work only with their existing business customers. > The Treasury Department said the program would start taking applications on April 3, a week after the bill was signed into law. But the department didn’t give lenders necessary technical information until just hours before the program was scheduled to start — and lenders are still waiting for some key guidance and documents, bankers said. Many are still developing their application rules and systems. Most businesses that need the loans have been closed for 2-3 weeks now and it will most likely take at least another 2-3 weeks for them to see any money from those loans in their bank accounts[0,1], if they are lucky enough to qualify. Very few can wait that long before having to close for good. Then, if you are able to get a loan, there are very important limitations to forgiveness (from the link in your comment): > Your forgiveness amount equals your total payroll costs multiplied by the average number of FTE employees you retained for the eight weeks following the date of your loan origination > You must spend at least 75% of your loan on payroll. From another, more recent, article[1]: > The agency said that “not more than 25 percent” of the forgiven amount may be used for nonpayroll costs, like rent. So you only get up to 8 weeks of payroll, from the moment you get the loan (it won't cover anything you already paid), and then at least 75% must be used for payroll. So for example a restaurant, is very unlikely to be able to meet those requirements, because they are barely employing anyone right now, and their biggest expense is their lease, which they won't be able to cover with 25% of the PPP loan that should be used for their payroll. The restaurant would then need another loan to pay the lease, but that's a super risky loan, both for them and for the bank - the bank will probably not approve them and if they did, it would be under very bad terms for the restaurant. Banks are not in the business of losing money. 0: https://money.com/sba-loans-stimulus-ppp-application-requirements/ https://money.com/sba-loans-stimulus-ppp-application-require... 1: https://www.nytimes.com/article/small-business-loans-stimulus-grants-freelancers-coronavirus.html https://www.nytimes.com/article/small-business-loans-stimulu...

quickthrowman 7y ago

To reinforce the warning at the end, the put/call ratio on HYG is currently 12 (!) Lots of money is betting on it falling in price. The Fed is also not buying non-IG bonds (yet) so nobody will be supporting HYG/JNK in the way LQD will be. If they start buying those, HYG will soar. An oil price spike and recovery would help HYG too. To be fair, I did make money on weekly HYG calls today, but that was a hedge ;) 4/9 76C from .50 to 1.18

deleted 7y ago
[deleted]

agilebyte 7y ago

For anyone just googling "HYG" and seeing a flat chart (with a dip at the end), use a tool like Portfolio Visualizer to see the effect of bond ETF dividends. Put "HYG" under ticker, set it to 100% and make sure to set Display Income to "Yes". You'll get compound annual growth rate (4.52%) and the inflation adjusted value (2.76%) as well. https://www.portfoliovisualizer.com/backtest-portfolio https://www.portfoliovisualizer.com/backtest-portfolio

smabie 7y ago
What a world we live in now that 4.52% is the yield for junk bonds.
- SilasX 7y ago
  That's not the yield, but the long-term growth rate, accounting for defaults. But yes, for a while 5% was a typical junk bond yield. As of last month, though, it shot up to ~8 percent, or 10 for B-grade. https://news.ycombinator.com/item?id=22817962 https://news.ycombinator.com/item?id=22817962

ThrustVectoring 7y ago

> What are you going to pay the interest with, your negative profits? Capital structure arbitrage means that there's a market for any public company's junk bonds regardless of their balance sheet position. What matters is the likelihood of collapse, as measured by put option pricing. The logic is pretty straightforward. You buy the bond, put options on the common equity, and short the appropriate treasury futures contract. If the company fails to pay the bond as agreed, you get your money back via the put options. If they don't, you collect the excess premium of the junk bonds, minus the cost of delivering the short treasury futures contracts and the premium paid for the put options that are expiring worthless. At no point does the actual creditworthiness of the company matter in this analysis. The arbitrageurs need not care. If the equity market believes that they have a future, they're either right and you get paid back on the junk bonds, or they're wrong and you pick their pocket shorting the company.

evandijk70 7y ago
This is clearly not true, because if any company can find a market for their bonds, no company would ever need to go bankrupt. Puts would be prohibitively expensive if the company is likely to go bankrupt.
- ThrustVectoring 7y ago
  There's a market, there's not a market of unlimited size (or even one large enough to make a meaningful difference to solvency). As one upper limit, if you borrow literally every publicly available share and sell it short, that limits you to hedging bonds up to the total market capitalization of the company.
lordnacho 7y ago
What's the sticking point here? What if you have competitors doing the same arb? Seems like it's not a pure guaranteed arb. What parameters are pushed to the margins? I'm an ex derivatives trader so you can go into details.
- ThrustVectoring 7y ago

SilasX 7y ago

Oh wow, that's a change. But FWIW, I don't think it's very helpful to look at an aggregate like that, which doesn't distinguish between (at least pre-crisis) ratings. For some other datapoints, I would recommend: 1) S&P BB-rated bond index (just below investment grade), which shows a 6.3% yield for that grade. https://fred.stlouisfed.org/series/BAMLH0A1HYBBEY https://fred.stlouisfed.org/series/BAMLH0A1HYBBEY 2) I do see a 10% yield at the B rating: https://fred.stlouisfed.org/series/BAMLH0A2HYBEY https://fred.stlouisfed.org/series/BAMLH0A2HYBEY So that must be what the market is effectively classing Airbnb as. 3) The Vanguard high-yield corporate fund, which shows an 8.1% yield: https://investor.vanguard.com/mutual-funds/profile/overview/vweax https://investor.vanguard.com/mutual-funds/profile/overview/... (Also an aggregate like the high yield index you listed and noisy for that reason.)