| Topic Name: |
bond conundrum |
| Message Name: |
The company is reall |
| Date Posted: |
02/28/2000 |
| In Reply To: |
The debt, or that portion of it, will at least temporarily be less risky. Because they are paying less than the market, they are in fact saving money, hence making a "gain." However, I would talk the gain out of the company valuation as it will most likely be unrealized. Just like deferred tax assets, you need to look why the company is claiming they made money from nothing.
You also need to look at the other part of the equation: equity. If the increasing interests rates are expected to stay awhile, the market value of the stock could rise, due to the "cheaper" interest payments and decreased risk of bankruptcy. |
| Message: |
The company is really not any less risky. They still have to service the same amount of debt and interest payments as before the interest rate hike. Their interest coverage (EBITDA/Interest Expense) and leverage (Debt/EBITDA) ratios will not change. They are relatively better off than those companies that did not "lock in" the lower interest rate, however, they are no less risky than they were before. As far as their equity value going up, it will most likely be the opposite. All things being equal, higher interest rates usually mean lower equity values.
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