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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Graham Osborn who wrote (57588)

7/21/2016 7:02:20 AM

From: Spekulatius

Read Replies (1) | Respond to of 78715

Re loans

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

Well, companies don't typically repay the principal of their loan - they refinance it. If a company had only a 100 year loan, I would not worry too much about repaying. I would worry much more about them being able to repay or refinance other liabilities, before the loan becomes due.

A company like DISCA probably pays about 4% for their loans blended. If they spent 15% of their operating earnings for debt service, that is OK in my book. There is a chance that interest rates stay where they are, which means that they can replace the debt coming due with lower interest rate loans. If the interest rates go up, they can use some of the FCF to reduce pay back the loans coming due and delever. Other business with less free cash flow may not have that option (utilities come to my mind), but the regulated ones often are able to get the expense paid by their customers.

I guess every situation is different. In any case, the prolonged low interest rates will probably lead to more debt financing. Heck, even I decided to take a 5 year car loan for 2% interest rates from a credit union, even though I could have paid cash.