Dumb Question - What is the Point of Debt Amortization from a Returns Perspective?
This is going to be a pretty dumb / obvious questions for most...
From a pure returns perspective, how do mandatory debt repayments help with IRR? I understand that it would reduce your principal balance over time, reducing your interest expenses.
However, if interest rates are modest / low, would it generally not be beneficial to do a bullet to push out the repayment until the end? This is purely from IRR perspective and not considering what would be feasible / tolerated by lenders.
Am I missing another lever here, apart from the interest expense reduction? Thanks!
From a pure equity returns standpoint the only real benefit is reducing interest expenses.
In practice however you want amortization to be as low as possible so you have more flexibility with the companies cash. Pursuing capex projects, using cash towards M&A, discretionary debt pay down, etc. But a lender is going to push for greater amortization so they improve their own irr and have more certainty of repayment.
Got it, in-line with what I was thinking. If only we could all take bullets!
nope you're right - low amort just helps with FCF. but it's also a debt term that a lender would (almost) never agree to.
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