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Strategies & Market Trends : Value Investing

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E_K_S

To: Spekulatius who wrote (57572)	7/21/2016 3:50:50 AM
From: Graham Osborn	1 Recommendation Read Replies (1) of 78708

So here's something I struggle with as the ECB squeezes 30-year corporates down in the 1-2% range. Suppose you had 100-year zero corporate and it becomes evident 10 years in that the company is unlikely to ever be able to repay the principal. What happens to the common? Interest should still be easily covered, so theoretically there is no immediate danger and there should still be plenty of 90-year optionality to come up with some way to make good on the bonds. The problem I see is debt metrics. Debt/ EBITDA is the typical covenant and is independent of interest rates. If Debt/ EBITDA is violated and lenders are not accommodating, early repayment is triggered. Thus, even for bonds with very long maturities, serviceability of principal is not "forgotten." I find it very troubling when people brush off debt loads formerly considered crippling based on the current low rates. All it would take is a minor recession/ earnings dip to trigger early repayment provisions on trillions in corporate debt. OT: Is this Pokemon Go thing for real? I'm in Kaua'i and even here pretty much everyone under age 30 is walking around playing it.

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