
Junk-Bond Sellers Desperate for Funding Swallow Yields over 10% - SREinSF
https://www.bloomberg.com/news/articles/2020-05-05/indonesian-borrowers-bring-dollar-bond-deals-to-boost-buffers
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sokoloff
In the 80s, we were borrowing money for mortgages (secured by houses with
tenants and 20% downpayments) at rates over 15%.

I don’t find yields over 10% given the current economic climate to be
unreasonable or evidence of “desperation” on the part of sellers. I would
probably find rates of _under_ 10% as evidence of desperation on the part of
buyers...

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bald
In order to draw a conclusion, we should look at the _real_ interest rate vs.
the nominal one.

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snidane
Real interest rate depends on inflation which is an invented phenomenon of the
20th century. Inflation wasn't relevant in the preceding century and might not
be relevant in 21st century either.

At least not in the current form it is measure as a CPI while ignoring asset
price inflation in real estate and stock markets.

Whether that is a bug or feature remains to be seen, but for most people a
psychological effect of large inflation has been present at least since the
last big ceisia in 2008. Banks keep flooding the economy with new QE money and
asset prices and rent payments keep increasing. Many people are not able to
afford housing and birth rates plummet for not being able to have stability
necessary to raise a family.

Whether somebody adds a patch to the inflation theory such as the concept of
Biflation (inflation in asset prices, deflation in cheap goods manufactured by
robots and imported from China at the same time) or throws thr concept of
inflation out of the window completely is the question for economists for this
century.

~~~
mrep
> while ignoring asset price inflation in real estate and stock markets.

Do you have any data to back this up? Some quick math shows annualized S&P 500
Return with dividends reinvested from april 2010 to april 2020 are 9.694% [0]
which is entirely in line with historical returns [1]. Housing price per
square foot hasn't really changed for most people either [2].

[0]: [https://dqydj.com/sp-500-return-
calculator/](https://dqydj.com/sp-500-return-calculator/)

[1]:
[https://en.wikipedia.org/wiki/S%26P_500_Index#Performance](https://en.wikipedia.org/wiki/S%26P_500_Index#Performance)

[2]: [https://www.supermoney.com/inflation-adjusted-home-
prices/](https://www.supermoney.com/inflation-adjusted-home-prices/)

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echelon
Companies were over-leveraged and didn't have cash stockpiles. They're trying
to get liquid cash so they don't have to divest of assets in a market that
isn't buying or go into chapter 11.

All the same, people are willing to extend loans because they are long on the
economy, recovery, and return to normalcy. The engines are starting again.

The biggest issue was that companies were over-leveraged with debt. Maybe
we'll learn a lesson from this, although I suspect opportunity cost will
prevent many from being more prudent.

~~~
alexpetralia
To play devil's advocate, how are companies over-leveraged during an
environment of such low interest rates? Companies will optimize their capital
structure for the lowest cost of capital, and if the cost of debt decreases,
companies should rationally leverage accordingly.

That's why we see Apple issuing $8B of debt (at ~135bps over 30 year Treasury
bonds!) despite having over $200B of cash on hand. If your hurdle rate is
2.5%, surely your profitable business can return more to shareholders than
that, so you should binge on this capital source? (Or even, as Apple claims it
will do, distribute this directly to shareholders via buybacks & dividends.)

Also, I would qualify your statement that people are not necessarily long the
economy in the short-term, which is where credit markets have miraculously
thawed; they're long the fact that they will undoubtedly be able to get credit
from yet someone else (namely, the lender of last resort).

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gwd
GP said "leveraged _and didn 't have cash stockpiles_". Your example of Apple
may fit the first criteria, but not the second.

And this is exactly why you _should_ have a cash stockpile, either as a
company or an individual: You can never tell when a random event will
completely wipe out your earnings for 6 months.

I'm no corporate financier, but I've certainly heard arguments in favor of
borrowing money during times of low interest rates _in order to have_ a cash
stockpile. But borrowing to do stock bybacks _when you don 't have a
stockpile_ is just skating further out onto thinner and thinner ice.

~~~
cat199
> But borrowing to do stock bybacks when you don't have a stockpile is just
> skating further out onto thinner and thinner ice.

this also partly depends on your expectation on the availability to resell the
stocks later on if desired

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SilasX
If you're creating the cash buffer as a way to stay afloat during hard times,
that's a bad strategy, since the market for shares (including yours) will be
weak precisely when you need the cash.

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rfreytag
[https://archive.is/skzZQ](https://archive.is/skzZQ)

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m3nu
Looks like we're setting ourselves up for a junk bond bubble down the road.

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phyalow
Central banks will just buy them onto their balance sheets. Its already begun:

[https://ftalphaville.ft.com/2020/04/30/1588254981000/How-
sho...](https://ftalphaville.ft.com/2020/04/30/1588254981000/How-should-the-
Fed-buy-junk-bonds-/)

[https://www.afr.com/markets/debt-markets/why-the-rba-is-
lend...](https://www.afr.com/markets/debt-markets/why-the-rba-is-lending-
against-corporate-bonds-20200505-p54q2v)

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nerbert
This is really worrying. There is no central bank of central bank, so this
really is the last lifeline. The system has been pushed to its limit.

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zhte415
A central bank is the lender of last resort.

Bank of International Settlements is the central bank of central banks.
[https://en.wikipedia.org/wiki/Bank_for_International_Settlem...](https://en.wikipedia.org/wiki/Bank_for_International_Settlements)

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BlackVanilla
Can anybody who understands better than me explain how this links to central
banks' quantitative easing policies and the big macroeconomic picture?

~~~
marticode
It doesn't directly. The central banks have lowered "safe rates" down to zero
and sometimes below, but desperate businesses still have to offer high yields
over 10% to find willing lenders.

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drumhead
Is this a buy signal for some of these travel or travel related companies I
wonder? I can see them having a issue with cashflow now, but its not always
going to be like this, people will need rental cars, maybe not as many, but
they will need them. Potential consolidation first to reduce capacity and then
price rises.

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jeffdavis
Curious how all of these crazy interest movements will affect the housing
market. Deflation sounds bad for housing values, but then again, it means
interest rates will stay low, propping up values. And then there's the
generally-crazy bay area market.

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jl2718
Anybody know how usury laws apply to bonds, especially for sole
prop/partnerships or personally-secured debt?

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alecco
This is unsustainable debt levels. It's like living on credit cards. These
companies and countries should be downsizing.

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pjc50
At the moment? Downsizing employers in the emergency will likely wreck the
recovery, and you can't "downsize" a country without a body count.

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erikig
For an example of that see: 1929 & Money Supply Reduction.

