https://fred.stlouisfed.org/series/BAMLH0A0HYM2EY
BTW, junk bonds can be pretty solid investments. $HYG for the ETFs era (beware: it has decent energy exposure).
https://fred.stlouisfed.org/series/BAMLH0A0HYM2EY
BTW, junk bonds can be pretty solid investments. $HYG for the ETFs era (beware: it has decent energy exposure).
And that's the reason why the SBA loans that are part of the stimulus package are not going to save the small businesses they are supposed to be saving.
Anyways, I can relate. I raised money through convertible notes instead of equity, because reasons. Then when we didn't do a valued round soon enough (2 years expiration), one of the investors called his note, sued, forced us into bankruptcy, bought the assets at auction, and is now suing me and my cofounder personally to repay his note.
So, never doing that again. Debt is not a very good financing tool for small businesses that are exposed to a lot of risk (almost all of them right now).
Please excuse the all caps, but I think it's very important that this be as widely known as possible, so that someone doesn't let their business fail because they weren't aware of how this program works.
https://restaurant.org/Articles/News/How-the-CARES-Act-SBA-l...
The program is not perfect and there are restrictions, but if you qualify, this is basically a grant, not a loan. It uses the existing SBA loan infrastructure so that the money can be disbursed very quickly through commercial banks.
Agreed. So let's clarify a few things.
For the loan to be forgiven, you first need to be able to get it. From NYTs SBA loans page[1]:
> You must apply through a bank or other lender, so start by contacting one you already have a relationship with. Many banks are imposing restrictions and choosing to work only with their existing business customers.
> The Treasury Department said the program would start taking applications on April 3, a week after the bill was signed into law. But the department didn’t give lenders necessary technical information until just hours before the program was scheduled to start — and lenders are still waiting for some key guidance and documents, bankers said. Many are still developing their application rules and systems.
Most businesses that need the loans have been closed for 2-3 weeks now and it will most likely take at least another 2-3 weeks for them to see any money from those loans in their bank accounts[0,1], if they are lucky enough to qualify. Very few can wait that long before having to close for good.
Then, if you are able to get a loan, there are very important limitations to forgiveness (from the link in your comment):
> Your forgiveness amount equals your total payroll costs multiplied by the average number of FTE employees you retained for the eight weeks following the date of your loan origination
> You must spend at least 75% of your loan on payroll.
From another, more recent, article[1]:
> The agency said that “not more than 25 percent” of the forgiven amount may be used for nonpayroll costs, like rent.
So you only get up to 8 weeks of payroll, from the moment you get the loan (it won't cover anything you already paid), and then at least 75% must be used for payroll. So for example a restaurant, is very unlikely to be able to meet those requirements, because they are barely employing anyone right now, and their biggest expense is their lease, which they won't be able to cover with 25% of the PPP loan that should be used for their payroll. The restaurant would then need another loan to pay the lease, but that's a super risky loan, both for them and for the bank - the bank will probably not approve them and if they did, it would be under very bad terms for the restaurant. Banks are not in the business of losing money.
0: https://money.com/sba-loans-stimulus-ppp-application-require...
1: https://www.nytimes.com/article/small-business-loans-stimulu...
I agree - but that wasn't the point you raised in your original post.
> So you only get up to 8 weeks of payroll, from the moment you get the loan (it won't cover anything you already paid), and then at least 75% must be used for payroll. So for example a restaurant, is very unlikely to be able to meet those requirements, because they are barely employing anyone right now, and their biggest expense is their lease, which they won't be able to cover with 25% of the PPP loan that should be used for their payroll.
The intent of the program would be for the restaurant to maintain their payroll at pre-shutdown levels, rehiring and paying their employees to do nothing if necessary.
The point is: debt/loans are not a silver bullet that will magically solve liquidity/solvency issues for small businesses. They come with important drawbacks and restrictions as well as legal liabilities. Buyer beware.
About the restaurants: what is the restaurant owners incentive to get a PPP loan? It doesn't really make sense to go through the pain of getting a loan, just to rehire/keep employees for 8 weeks doing nothing, while at the same time not being able to pay their rent/lease, and having no idea when/if they'll be able to reopen.
Debt + high business uncertainty is a bad combo.
I’ve been assuming the best case scenario for them is to slow the death of many of them. Some will hang on for awhile, and the shorter this goes on the better the survival rate.
On what grounds?
In the end we'll "win" this, but that will not save us from having to spend $50-$150k in lawyers to resolve it (if this goes all the way to trial, it's about 18-24 months of paying lawyers which cost about $500/hr, at about 10hrs/month).
Edit: ignore my comment; didn't realize the debt "leaked" through the corporate capital structure directly to the founders; I agree that investor is probably quite an asshole.
(I'm not questioning that an investor via convertible note has the ability to call the note due from the company. The specific sentence quoted in my reply regarded the expectation of personal repayment after the company was driven into bankruptcy.)
1) S&P BB-rated bond index (just below investment grade), which shows a 6.3% yield for that grade.
https://fred.stlouisfed.org/series/BAMLH0A1HYBBEY
2) I do see a 10% yield at the B rating:
https://fred.stlouisfed.org/series/BAMLH0A2HYBEY
So that must be what the market is effectively classing Airbnb as.
3) The Vanguard high-yield corporate fund, which shows an 8.1% yield:
https://investor.vanguard.com/mutual-funds/profile/overview/...
(Also an aggregate like the high yield index you listed and noisy for that reason.)
Capital structure arbitrage means that there's a market for any public company's junk bonds regardless of their balance sheet position. What matters is the likelihood of collapse, as measured by put option pricing.
The logic is pretty straightforward. You buy the bond, put options on the common equity, and short the appropriate treasury futures contract. If the company fails to pay the bond as agreed, you get your money back via the put options. If they don't, you collect the excess premium of the junk bonds, minus the cost of delivering the short treasury futures contracts and the premium paid for the put options that are expiring worthless.
At no point does the actual creditworthiness of the company matter in this analysis. The arbitrageurs need not care. If the equity market believes that they have a future, they're either right and you get paid back on the junk bonds, or they're wrong and you pick their pocket shorting the company.
I'm an ex derivatives trader so you can go into details.
You can take on the equity risk either by delta-hedging it and shorting the underlying stock like you would when selling options, or you can buy options written by people who likely end up doing delta hedging. On the bond side, you can either buy the underlying and hedge interest rate risk in the treasury futures market, or you can take aim at the credit default swap market and buy/sell the credit spread directly. Either way, you're basically just modeling the relationship between different prices in a company's capital structure and noting how much money your combined position makes if prices converge at either corporate success or bankruptcy.
> What's the sticking point here? What if you have competitors doing the same arb?
You have competitors doing the same arb, there's no free money to be made. My point is that when a company decides to sell bonds, there are people who will buy it based off the solvency risk implied by equity option prices.
> Seems like it's not a pure guaranteed arb.
It's not, but the side I described generally doesn't have lurking steamrollers to run you over. Model breakdown is a thing that happens, especially during crises, and especially if you slightly under-hedge to avoid paying carry costs for the "equity does badly but no bankruptcy" profit case. Plus, there's no guarantee that buying put options or shorting common equity will make a profit if the underlying company goes kaput (for example, if trading is suspended in the underlying, your options can expire or your short position can charge you borrow fees while you are unable to legally purchase shares to deliver into the contract or to close your short).
Puts would be prohibitively expensive if the company is likely to go bankrupt.
The Fed is also not buying non-IG bonds (yet) so nobody will be supporting HYG/JNK in the way LQD will be. If they start buying those, HYG will soar. An oil price spike and recovery would help HYG too.
To be fair, I did make money on weekly HYG calls today, but that was a hedge ;) 4/9 76C from .50 to 1.18