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Comment by dalbasal | Hacker News Reader

"High-yield junk bonds" is such an unflattering way of putting things.

It always seemed strange to me that banks/bonds/lending seems to have such a small role in financing risky ventures. Is it just that capital is a better deal? How does risk work here, are bondholders effectively de-risked compared to stockholders?

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Debt holders (bonds) have a higher liquidity preference than equity (stocks) in the case of financial trouble. An oversimplified example being if Tesla was liquidated with $3B in assets, and $2B in debt, the debt holders would be paid $2B first and equity holders would split whatever was remaining.

But debts to suppliers and bank loans still get paid first right?

It seems unlikely with someone like Musk at the helm that the company would be wound up before assets (and loans guaranteed on them) didn't pay the salaries. Hence, in the case of liquidation, I can't see bondholders getting any more than shareholders - ie. NILL.

Am I mistaken?

Correct, suppliers etc are higher on the liquidity preference than debt. If something were to go wrong, its most likely that Tesla would get a soft landing (e.g acquisition by Toyota) that would pay debtors significantly more than equity holders, but doubtful it would be 100% of what is owed in that scenario.

In case of the company going belly up, creditors, bondholders etc. are first in line, and stockholders are last.

..what's the distance between beginning and end?

Is this risky venture generating enough cash-flow to pay the interests starting now and is it likely to return the principal back in a few years? If not, that's why it's not used more.

S&P B- corporate debt rating, and similar other ratings means Tesla are currently in junk bond territory.

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