Good point on ascribing motivations to others. I'll try to tone down my projections.
Regarding my sneaking assumption, the only one I see is that I assume those making the decisions care what future interest costs are to those who will bear the burden. Perhaps there are others that you could illustrate?
I realize the future interest burden is something difficult to discuss, given we can't 'assume all other things remain the same'.
If I were running a business, and I proposed as CFO to buy back long term bonds and substitute notes, I would probably highlight the lower interim interest burden, improved cash flow and so forth. The CEO/Board would probably weigh those benefits against the refinance risk going forward.
Will the business still need the additional working capital when the notes come due? Will the business have liquidity to redeem the notes at that time? Will market offer finance at favorable terms at a future date? Will the business have grown revenue such that higher refinance costs aren't a cash flow burden?
In other words, what are the risks for making the average duration shorter?
On the last CHK conf call, mgmt responded to an analyst question that they didn't see a need to pay down longer term notes. They preferred the debt in 'stronger hands' rather than dealing with a bank facility. Granted, the debt likely changes hands, but they have no obligation to repay it except under the terms already agreed to, and were comfortable leaving things as they were. Another company, I forget who, did a derivative swap, exchanging fixed interest for floating rate to the tune of 50 million. I said at the time, that they had made a bet on lower future rates, and had done the swap to improve cash flow in that outcome. Is there a hidden presumption in that simple model of the world I should be aware of?
Should we adopt a position that any entity is well advised to adjust it's financing any time it's possible to improve cash flow?
On the basis that improved cash flow may enable brighter future prospects, greater growth and easier future debt service/retirement? |
