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What are you talking about? Solvency is defined as the “state of having enough funds or liquid assets to pay all of one's debts”. Your statement couldn’t be mo

by voisin 2y ago

What are you talking about? Solvency is defined as the “state of having enough funds or liquid assets to pay all of one's debts”. Your statement couldn’t be more incorrect. Debt to equity/assets is the key consideration. Too much debt in a capital stack by definition decreases solvency (all else equal)

JumpCrisscross 2y ago
> Your statement couldn’t be more incorrect. Debt to equity/assets is the key consideration Oof, HN and its armchair finance. Solvency is leverage agnostic because it doesn’t directly change with leverage. You don’t cite the source for your quote, but it should be obligations or liabilities, not debt. When liabilities exceed assets, you’re insolvent. Being debt free doesn’t guarantee solvency. In practice they’re related because interest expense flows through to the income statement. But that is indirect. And you can lever something up infinitely without changing its solvency profile. (You change its risk, which in this sense means the probability is becomes insolvent in the future. Within the context of real estate, where extend and pretend is common, this distinction is highly relevant.) The CRE problem is not a creature of debt. It’s a function of a previously-useful asset becoming, suddenly, less useful.
- phkahler 2y ago
  >> The CRE problem is not a creature of debt. It’s a function of a previously-useful asset becoming, suddenly, less useful. While I agree with that, the reason it's become a national economic problem is because of the scale of the problem. I probably would not be as big a deal if interest rates never went so low.
  - JumpCrisscross 2y ago
    > the reason it's become a national economic problem is because of the scale of the problem. I probably would not be as big a deal if interest rates never went so low Sure. But that’s about cost of capital. Not debt. If it had all been financed with equity it would be a bit more resilient. But it would still be a massive problem.
- voisin 2y ago
  > Oof, HN and its armchair finance. I am a past CFA charterholder and spent a number of years doing deep fundamental analysis of public equities so not exactly armchair finance. I think the disconnect in our discussion is the use of the word agnostic and that capital stack “isn’t particularly relevant”. “All else equal” more debt decreases solvency and less debt increases solvency. It isn’t guaranteed in either direction, but to state that it is agnostic massively downplays the relevancy of debt in the capital stack to solvency. The fact that other variables (productivity of the assets, non-debt liabilities, etc) can also impact solvency doesn’t translate to “capital stack isn’t relevant”. These are directly related and incredibly important to assessing solvency.
  - JumpCrisscross 2y ago
    > not exactly armchair finance Sorry, I should not have said that. > the use of the word agnostic and that capital stack “isn’t particularly relevant” Consider metrics conventionally considered capital-structure agnostic. All of them are affected to some degree, in practice, by borrowing more or less. (Whether through interest expense or risk perceptions by investors, employees and customers.) Within the context of commercial real estate's size in our economy, whether it's financed with debt or equity is irrelevant to its value drawdown. The root of the problem, as OP suggests, is not in debt. There is a separate problem in our banking system tied to CRE valuations. That's a debt problem. But that's a derivative of the fundamental problem of the properties' values going down. Those values would have gone down irrespective of how much was borrowed because the properties are being used less. (Nobody is choosing WFH because their office landlord is leveraged.)

by voisin 2y ago

JumpCrisscross 2y ago

> Your statement couldn’t be more incorrect. Debt to equity/assets is the key consideration Oof, HN and its armchair finance. Solvency is leverage agnostic because it doesn’t directly change with leverage. You don’t cite the source for your quote, but it should be obligations or liabilities, not debt. When liabilities exceed assets, you’re insolvent. Being debt free doesn’t guarantee solvency. In practice they’re related because interest expense flows through to the income statement. But that is indirect. And you can lever something up infinitely without changing its solvency profile. (You change its risk, which in this sense means the probability is becomes insolvent in the future. Within the context of real estate, where extend and pretend is common, this distinction is highly relevant.) The CRE problem is not a creature of debt. It’s a function of a previously-useful asset becoming, suddenly, less useful.

phkahler 2y ago
>> The CRE problem is not a creature of debt. It’s a function of a previously-useful asset becoming, suddenly, less useful. While I agree with that, the reason it's become a national economic problem is because of the scale of the problem. I probably would not be as big a deal if interest rates never went so low.
- JumpCrisscross 2y ago
  > the reason it's become a national economic problem is because of the scale of the problem. I probably would not be as big a deal if interest rates never went so low Sure. But that’s about cost of capital. Not debt. If it had all been financed with equity it would be a bit more resilient. But it would still be a massive problem.
voisin 2y ago
> Oof, HN and its armchair finance. I am a past CFA charterholder and spent a number of years doing deep fundamental analysis of public equities so not exactly armchair finance. I think the disconnect in our discussion is the use of the word agnostic and that capital stack “isn’t particularly relevant”. “All else equal” more debt decreases solvency and less debt increases solvency. It isn’t guaranteed in either direction, but to state that it is agnostic massively downplays the relevancy of debt in the capital stack to solvency. The fact that other variables (productivity of the assets, non-debt liabilities, etc) can also impact solvency doesn’t translate to “capital stack isn’t relevant”. These are directly related and incredibly important to assessing solvency.
- JumpCrisscross 2y ago
  > not exactly armchair finance Sorry, I should not have said that. > the use of the word agnostic and that capital stack “isn’t particularly relevant” Consider metrics conventionally considered capital-structure agnostic. All of them are affected to some degree, in practice, by borrowing more or less. (Whether through interest expense or risk perceptions by investors, employees and customers.) Within the context of commercial real estate's size in our economy, whether it's financed with debt or equity is irrelevant to its value drawdown. The root of the problem, as OP suggests, is not in debt. There is a separate problem in our banking system tied to CRE valuations. That's a debt problem. But that's a derivative of the fundamental problem of the properties' values going down. Those values would have gone down irrespective of how much was borrowed because the properties are being used less. (Nobody is choosing WFH because their office landlord is leveraged.)