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Are you familiar with Mogdilani-Miller? Being able to pay off debt does not increase the value of equity. The capital structure has changed but that makes no di

Are you familiar with Mogdilani-Miller? Being able to pay off debt does not increase the value of equity. The capital structure has changed but that makes no difference for the actual value of the business (which is determined by cash flows). And, ofc, it is massively value-dilutive in practice for shareholders. Debt is extremely cheap and equity is expensive. And, in this case, massive amounts of value have been destroyed by issuing equity at a valuation that can't be sustained by cash flows. Indeed, what has happened is the exact opposite of what you think has happened: the share price has increased, and that has given management the opportunity to destroy value by rinsing shareholders. Debt holders that were facing total loss have been bailed out by equity. Whatever the value of the debt was, that is the close to the amount that has been lost (because the value of that debt was close to zero). This is Corp Finance 101 but the marginal investor today doesn't understand this (unf, debt investors do, bankers do, mgmt do...they have made out with a couple of yards, equity got rinsed once again). Nothing goes anywhere in finance. All that is happening in AMC and GME is people trading capital loss between themselves (and debt investors finding someone to buy their capital loss at 100c in the dollar).

CPLX 5y ago
It’s not that deep. The basic premise I’m putting forward, which is that in general investing in an company might have the potential to help that company succeed, is utterly trivial and obvious. Also trivial and obvious is that fact that an excessive debt burden can cripple and kill a company that might have otherwise succeeded. There is indeed subtlety to this, needless to say. But basic observation is essentially unarguable: when a whole ton of people decide to buy stock in a company it affects that company’s prospects.
- hogFeast 5y ago
  Correct. Lots of people bought into the stock at a valuation in excess of fundamental value, bankers saw an opportunity, equity holders got rinsed, and debt holders got paid in full immediately on a junk credit.

CPLX 5y ago

It’s not that deep. The basic premise I’m putting forward, which is that in general investing in an company might have the potential to help that company succeed, is utterly trivial and obvious. Also trivial and obvious is that fact that an excessive debt burden can cripple and kill a company that might have otherwise succeeded. There is indeed subtlety to this, needless to say. But basic observation is essentially unarguable: when a whole ton of people decide to buy stock in a company it affects that company’s prospects.

hogFeast 5y ago
Correct. Lots of people bought into the stock at a valuation in excess of fundamental value, bankers saw an opportunity, equity holders got rinsed, and debt holders got paid in full immediately on a junk credit.