I wanna preface my question by acknowledging I’m being facetious, but when companies issue debt to retire upcoming maturities, isn’t that sort of like a Ponzi scheme? Essentially what they’re doing is taking money from new investors and paying out old investors, and the cycle continues.
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Except for differing interest rates and maturity which should reflect (ideally) lower duration and hence saved costs
But simplistically you are correct
That’s the issue when you need to refinance during a liquidity crunch.
The big difference is that ponzi scheme = insolvabt The assets are never there yo support the liabilities.
The trick with debt refinancing is that you can be solvant (value of assets > value of liabilities) but be illiquid. It’s not the same concept
I'm going to leverage my life savings 20x and then just swapping credit cards
What else would they do? Having zero leverage makes no sense for almost all companies. The terms of the debt (amt, maturity, rate etc.) should be updated periodically to reflect market conditions and be optimal for the company but it’s not like the goal is to just have equity…
Not really, company's typically sustain debt proportional to their cash flows and strategic objectives, optimizing liquidity and cost of capital. Even large corporates may be AA and have sizable one-off capex needs or cyclicality. Wealthy individuals (or consumers with mortgages and lines of credit) do the exact same thing. It's more efficient and also benefits you from a tax perspective. Very little benefit from carrying no debt for most companies. Debt remains proportional to cash flows, not ever increasing beyond the ability to repay.
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