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I'm not well versed in the economics, so could you elaborate how the corporate debt would be a problem in this economy? Wouldn't the lowered rates & other activ

I'm not well versed in the economics, so could you elaborate how the corporate debt would be a problem in this economy? Wouldn't the lowered rates & other activities by Fed be helpful for the entities with massive debt?

cm2187 6y ago
The fed can help with liquidity (i.e. ensuring that whoever needs to fund itself has liquidity by flooding the capital markets with cash). It cannot help with solvency though (if you can't afford your debt because your revenues collapsed, no private lender is going to lend to you, even if they have the capacity to fund the loan). The interest expense is low, but when your debt becomes due, it is the end of the game.
- Groxx 6y ago
  Ignoring (increasingly common) bailouts, basically, yeah.
  - 0x8BADF00D 6y ago
    Even if the Fed nationalized every US company, the interest rate would skyrocket in the corporate debt market. It actually makes things worse. No creditor will want to touch those bonds, hence the interest rate naturally increases to entice would be creditors.
arawde 6y ago
When a downturn like this happens, the Federal Reserve lowers rates to encourage spending. But at the same time, people are less likely to hold corporate debt and instead hold cash. People are less likely to hold corporate debt because the corporation has less revenue to service its debt. In the case of a (highly) public company which doesn't have profits, if Uber were to try to sell bonds, the spread over, say, treasuries, would probably be above 8-10%. In other words, corporate debt isn't priced according to lowered rates. It's priced according to what bond investors would need to be paid in order to adequately compensate for the risk of Uber going bankrupt. The only way the Fed would help would be if the Fed bought Uber's bonds, but that would require Uber to be investment grade, which would be laughable, or a "fallen angel", a company which was investment grade before the crisis but has since been downgraded.
- chrisco255 6y ago
  The Fed is buying junk bonds right now: https://www.bloomberg.com/news/articles/2020-04-09/fed-unleashes-fresh-steps-for-as-much-as-2-3-trillion-in-aid https://www.bloomberg.com/news/articles/2020-04-09/fed-unlea... This underscores the desperate maneuvers the Fed is undertaking to avoid the inevitable. They've killed the free market to save zombies like Uber, which are unprofitable.
  - michaelyoshika 6y ago
    Socialism is coming, whether we admit it or not.
    - turingbike 6y ago
      The Fed's policies (at least since 2008) could be described as "socialism for the management upper class" - they got free money that they gave to themselves as bonuses. Their companies were buoyed up, regardless of what the market wanted or whether the business was sound.
    - pstuart 6y ago
      It would be nice if it was shepherded by those that believe in "public good". My hopes are tempered in that regard.
  - arawde 6y ago
    From the article (emphasis added) > The Fed said Thursday it will invest up to $2.3 trillion in loans to aid small and mid-sized businesses and state and local governments as well as fund the purchases of some types of high-yield bonds, collateralized loan obligations and commercial mortgage-backed securities. The qualifier is the fallen angels clause which I mentioned. The way this works is that the Fed buys investment-grade ETFs. The underlying indices for those funds still have companies which have been downgraded to junk, which are the falled angels. The Fed isn't going out and purchasing bonds directly in the bond market, they're using existing infrastructure to perform market operations.
nerfhammer 6y ago
fed mostly only helps cover short-term debts, not long-term debts.

cm2187 6y ago

The fed can help with liquidity (i.e. ensuring that whoever needs to fund itself has liquidity by flooding the capital markets with cash). It cannot help with solvency though (if you can't afford your debt because your revenues collapsed, no private lender is going to lend to you, even if they have the capacity to fund the loan). The interest expense is low, but when your debt becomes due, it is the end of the game.

Groxx 6y ago
Ignoring (increasingly common) bailouts, basically, yeah.
- 0x8BADF00D 6y ago
  Even if the Fed nationalized every US company, the interest rate would skyrocket in the corporate debt market. It actually makes things worse. No creditor will want to touch those bonds, hence the interest rate naturally increases to entice would be creditors.

arawde 6y ago

When a downturn like this happens, the Federal Reserve lowers rates to encourage spending. But at the same time, people are less likely to hold corporate debt and instead hold cash. People are less likely to hold corporate debt because the corporation has less revenue to service its debt. In the case of a (highly) public company which doesn't have profits, if Uber were to try to sell bonds, the spread over, say, treasuries, would probably be above 8-10%. In other words, corporate debt isn't priced according to lowered rates. It's priced according to what bond investors would need to be paid in order to adequately compensate for the risk of Uber going bankrupt. The only way the Fed would help would be if the Fed bought Uber's bonds, but that would require Uber to be investment grade, which would be laughable, or a "fallen angel", a company which was investment grade before the crisis but has since been downgraded.

chrisco255 6y ago
The Fed is buying junk bonds right now: https://www.bloomberg.com/news/articles/2020-04-09/fed-unleashes-fresh-steps-for-as-much-as-2-3-trillion-in-aid https://www.bloomberg.com/news/articles/2020-04-09/fed-unlea... This underscores the desperate maneuvers the Fed is undertaking to avoid the inevitable. They've killed the free market to save zombies like Uber, which are unprofitable.
- michaelyoshika 6y ago
  Socialism is coming, whether we admit it or not.
  - turingbike 6y ago
    The Fed's policies (at least since 2008) could be described as "socialism for the management upper class" - they got free money that they gave to themselves as bonuses. Their companies were buoyed up, regardless of what the market wanted or whether the business was sound.
  - pstuart 6y ago
    It would be nice if it was shepherded by those that believe in "public good". My hopes are tempered in that regard.
- arawde 6y ago
  From the article (emphasis added) > The Fed said Thursday it will invest up to $2.3 trillion in loans to aid small and mid-sized businesses and state and local governments as well as fund the purchases of some types of high-yield bonds, collateralized loan obligations and commercial mortgage-backed securities. The qualifier is the fallen angels clause which I mentioned. The way this works is that the Fed buys investment-grade ETFs. The underlying indices for those funds still have companies which have been downgraded to junk, which are the falled angels. The Fed isn't going out and purchasing bonds directly in the bond market, they're using existing infrastructure to perform market operations.

nerfhammer 6y ago

fed mostly only helps cover short-term debts, not long-term debts.