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Principles of finance ah la shmoop serial bonds laddering and

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bond duration Okay so you're the wily cfo of capital

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pig dot com you need to raise debt all the

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time because the underground fourteen thousand miles of tunnels your

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company is building before it can receive any revenues will

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rip quirot lots and lots of dough If you went

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out to the market today to try and raise twenty

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five billion dollars have dead well that would be hugely

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inefficient because you can't spend more than a billion dollars

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a quarter digging those tunnels and like why would you

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pay to rent twenty five thousand square feet of housing

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when you only need a thousand square feet toe livin

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Well debt works kind of the same way so you

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decide that you're going to do a bond offering serially

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that is you're going to offer bonds in the amount

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of five billion dollars per offering every year for the

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next five years so that you roughly match your capital

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needs with your cash inflows from the buyers of debt

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you're selling to all around the world so now you'll

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roll the clock forward six years and it turns out

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there's a nice little business driving underground all around los

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angeles because traffic there is so plugged with out of

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work actors delivering pizza Well luckily we issued buns in

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away such that all did not come do at the

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same time had we raised twenty five billion dollars up

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front and just sat with the money in our bank

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account Well would've cost the company of fortune in interest

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or money rental rates during that time when we didn't

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need it What a waste But we raised the money

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in smaller pieces with each bond being a ten year

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duration and after six years the very first five billion

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dollars offering is not all that far away from coming

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do well Luckily interest rates have come down a bit

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and there's plenty of demand in the bond market for

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buyers as most people love avoiding traffic and we're set

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up to make another five billion dollar bond offering the

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proceeds of which will replace the five billion dollars of

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principle we have coming due in four years Well the

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key thing to note here is that we're a matching

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our capital raise needs with the duration of the bond

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The nightmare scenario would have been our raising that twenty

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five billion dollars all at once having it come to

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all the same week and then our not being able

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to raise twenty five billion dollars at the time to

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replace it That's one popular and loving way that companies

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go bankrupt In fact there's a famous case from gannett

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newspapers proud owners of myriad television stations local newspapers and

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use a today among other properties the company in the

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mid eighties never imagined that the newspaper industry could stumble

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and fall on hard times at least hard enough so

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that this once vaunted nifty fifty company would actually have

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problems raising debt against what it thought at the time

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were unassailably good assets Well then along came the financial

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crisis of a wayto nine and the one hundred thirty

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year plus ginette newspaper company almost went bankrupt because nearly

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all of its dead came due at the same time

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in the newspaper company simply couldn't raise the dough well

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cos generally like toe ladder there bond offerings and many

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small pieces to avoid just such a crisis And generally

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speaking they manage this laddering in two basic ways first

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They make offerings of bonds every year or two or

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three in small amounts This's actually smart business because it

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gives the management and excuse to hop on a plane

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and make personal direct contact with all of its existing

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bondholders holding their hands And you know other body parts

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if necessary to convey that all is good under the

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circus tent and that their investment is safe But companies

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also ladder the due dates of their bonds by offering

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them with siri's of different durations like a company might

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offer At the same time One siri's of bonds coming

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due in five years and another siri's coming doing ten

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And yet another coming due in thirty in this way

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cos protect themselves from what is called a liquidity squeeze

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or a time like the financial crisis of a wayto

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nine when nobody was invested in nothing other than bankruptcy

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lawyer firms that's like saying that the hottest business in

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your town is the local mortician and that's Not a 00:04:00.755 --> [endTime] good sign

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