Companies Finance

[ericthered]

For very large loans, you're likely not targeting a single investor, but a group of them. You don't raise money by finding a single angel investor, but by drumming up a whole bunch of them.

And that's pretty much implied in the rules on page 46: you don't need multiple rolls to get funding from multiple people.

EDIT: donny, your link just gives the search options, not the table you built with it.

[Donny Brook]

Originally Posted by ericthered

EDIT: donny, your link just gives the search options, not the table you built with it.

Dang.

Well, if anyone is interested I used the search criteria: NYSE, market capitalization > $50b, and Total Debt/Equity > 5.

After you run the screen use "edit columns" to select Total Debt/Equity as one of the display items. Top Results (format: Name; Market Capitalization; Debt to Equity Ratio):

GlaxoSmithKline PLC; 94,250,589,008; 14.71


United Parcel Service Inc.; 115,920,102,950; 12.53


Home Depot Inc.; 232,311,910,263; 10.06


Boeing Company; 204,003,749,714; 9.92

[Anaraxes]

Originally Posted by Alonsua

So now you got a company with a book value of 200 billions, with a debt/equity ratio of 0. Is it fine and realistic for that company to borrow 800 billion dollars?

Not that I'm an accountant myself, but "equity" and "book value" aren't the same thing. Roughly, equity is the amount of money the owners (stockholders) have in the company, while book value is the net worth of the physical stuff (cash on hand, inventory, buildings, equipment) owned by a company. The second isn't always a particularly good indicator of how much money a company can earn, especially in the modern economy.

Let's try a reality check on a few famous companies:

Debt/Equity current ratios (per Yahoo Finance):

GlaxoSmithKline: 3.94 (pharmaceuticals)
Verizon: 4.13 (telecoms)
Lockheed Martin: 6.56 (aerospace)
Goldman Sachs: 4.74 (finance)
Ford Motor Company: 4.47 (automotive)
Kimberly-Clark: 15.5 (paper products)
Wynn Resorts (WYNN): 25.6 (destination casino resorts, e.g. Vegas or Macau)

347 US stocks over 4:1 (out of 5133), 1427 world-wide (out of 34106). So it's certainly possible for a company with $200B in equity to accumulate debts of $800B. If you want a rule that says "no way you can borrow that much", that SBA number of 4 isn't terrible. Looks like it's about a 95% rule of thumb, but there are plenty of perfectly solid exceptions. If you want an absolute "that would be completely unthinkable" number, it'd have to be much higher than 4.

"Will you lend me X" has mostly to do with likelihood of repayment. Has the company been around a while, does it have good current revenue and profitability, good history of repaying its debts, spare cash flow to make debt payments, is it likely to continue to do well for the life of the loan? If the hypothetical company in question wants to borrow that much, it also needs to look like one of the 5% best lender risks around.

[Alonsua]

Originally Posted by Anaraxes

Not that I'm an accountant myself, but "equity" and "book value" aren't the same thing. Roughly, equity is the amount of money the owners (stockholders) have in the company, while book value is the net worth of the physical stuff (cash on hand, inventory, buildings, equipment) owned by a company. The second isn't always a particularly good indicator of how much money a company can earn, especially in the modern economy.

Let's try a reality check on a few famous companies:

Debt/Equity current ratios (per Yahoo Finance):

GlaxoSmithKline: 3.94 (pharmaceuticals)
Verizon: 4.13 (telecoms)
Lockheed Martin: 6.56 (aerospace)
Goldman Sachs: 4.74 (finance)
Ford Motor Company: 4.47 (automotive)
Kimberly-Clark: 15.5 (paper products)
Wynn Resorts (WYNN): 25.6 (destination casino resorts, e.g. Vegas or Macau)

347 US stocks over 4:1 (out of 5133), 1427 world-wide (out of 34106). So it's certainly possible for a company with $200B in equity to accumulate debts of $800B. If you want a rule that says "no way you can borrow that much", that SBA number of 4 isn't terrible. Looks like it's about a 95% rule of thumb, but there are plenty of perfectly solid exceptions. If you want an absolute "that would be completely unthinkable" number, it'd have to be much higher than 4.

"Will you lend me X" has mostly to do with likelihood of repayment. Has the company been around a while, does it have good current revenue and profitability, good history of repaying its debts, spare cash flow to make debt payments, is it likely to continue to do well for the life of the loan? If the hypothetical company in question wants to borrow that much, it also needs to look like one of the 5% best lender risks around.

It has been around since 1.990.

Here are the estimated revenues by segment:

https://docs.wixstatic.com/ugd/759d6...85eb5dc4f1.pdf

Here the stock chart since 1.990:

https://docs.wixstatic.com/ugd/759d6...e27150291c.pdf

The company has ($ In Millions):

Estimated Operating Profit: $144.007
Estimated Net Profit: $39.070 (This is called Resources by Boardroom and Curia)
Yearly Sales Growth: 10,96%

It has a "Startup Cost" by Boardroom and Curia of about $ 330.660 millions, which is what I would call Equity (maybe I am wrong?) and an estimated Market Cap of 2.769.036 millions (500 million shares at about $5.538,07 each).

[Alonsua]

Originally Posted by Donny Brook

Dang.

Well, if anyone is interested I used the search criteria: NYSE, market capitalization > $50b, and Total Debt/Equity > 5.

After you run the screen use "edit columns" to select Total Debt/Equity as one of the display items. Top Results (format: Name; Market Capitalization; Debt to Equity Ratio):

GlaxoSmithKline PLC; 94,250,589,008; 14.71


United Parcel Service Inc.; 115,920,102,950; 12.53


Home Depot Inc.; 232,311,910,263; 10.06


Boeing Company; 204,003,749,714; 9.92

Yes, I wouldn´t buy any of these though xD . Anyways none of these seem to have borrowed 800 billions, and by putting my google-fu at work all I could find is about 75 billion dollars borrowed by AB InBev, it seems to be the highest?

[whswhs]

Originally Posted by Alonsua

Yes, I wouldn´t buy any of these though xD . Anyways none of these seem to have borrowed 800 billions, and by putting my google-fu at work all I could find is about 75 billion dollars borrowed by AB InBev, it seems to be the highest?

If you owe a thousand dollars, you have a problem.
If you owe a million dollars, your bank has a problem.
If you owe a billion dollars, your government has a problem.
If you owe a trillion dollars, your species has a problem.

[johndallman]

Originally Posted by Alonsua

So now you got a company with a book value of 200 billions, with a debt/equity ratio of 0. Is it fine and realistic for that company to borrow 800 billion dollars?

Not all at once. If a company with no debt wanted to borrow that much all at once, the possible lenders' first question would be "what are you going to do with it?"

You're obviously going to do something new and different, and it's quite hard for the bankers to imagine any project that required spending all that money at once. Taking over a lot of large companies at once might require it, but there would be serious questions about your ability to absorb them.

So you need to borrow it gradually: start a new line of business, borrow to finance that, and perhaps some takeovers, and build up that borrowing over years. Bankers are much happier lending some more money to someone who already has debt and is managing it OK, than they are lending a huge pile t someone who doesn't have debt.

[Alonsua]

Originally Posted by Donny Brook

I'm curious which rules you are referencing in your first sentence. Also I don't understand how you arrive at a book value in your first paragraph or develop the equations you are using from what is published on SE46 (e.g. salaries are not mentioned in the section as far as I can tell).

That said, from a RW perspective, most established companies seeking very large amounts of credit will indeed not be funded from a single large source. More frequently several large lenders will each contribute a part of the loan, or the business will offer bonds for sale in the public market with potentially thousands of investors supplying parts of the overall borrowings.

Most lenders will want to have a high degree of certainty that the borrower has sufficient sustained cash flow to make the required payments, and secondarily assets to foreclose on in the event of default.

Lenders are much less concerned with profits because profits are calculated after all costs (including the cost of debt repayments). As long as the loan payments are covered, the amount of profit remaining after that is not of concern to the lenders.

On RW public markets, the ratio of debt to assets depends a lot on the nature of the company. A very stable business with large assets (e.g. a utility or real estate company) can often have a high (e.g. 3:1 to 5:1) debt/equity ratio (note that equity is a technical term with a meaningful definition), while businesses with less stable cash flow and fewer tangible assets will often be unattractive risks at even 1:1.

Here is an instructive table of large companies carrying large debt: https://web.tmxmoney.com/screener.php?qm_page=64050

Boardroom and Curia, Resource Value :)

[Alonsua]

Originally Posted by johndallman

Not all at once. If a company with no debt wanted to borrow that much all at once, the possible lenders' first question would be "what are you going to do with it?"

You're obviously going to do something new and different, and it's quite hard for the bankers to imagine any project that required spending all that money at once. Taking over a lot of large companies at once might require it, but there would be serious questions about your ability to absorb them.

So you need to borrow it gradually: start a new line of business, borrow to finance that, and perhaps some takeovers, and build up that borrowing over years. Bankers are much happier lending some more money to someone who already has debt and is managing it OK, than they are lending a huge pile t someone who doesn't have debt.

So what in this specific case?

Estimated revenues by segment:
https://docs.wixstatic.com/ugd/759d6...85eb5dc4f1.pdf
Stock chart since 1.990:
https://docs.wixstatic.com/ugd/759d6...e27150291c.pdf
The company has ($ In Millions):
Estimated Operating Profit: $144.007
Estimated Net Profit: $39.070 (This is called Resources by Boardroom and Curia)
Yearly Sales Growth: 10,96%
Total Debt: $ 58.573 at 6% yearly

[mlangsdorf]

Originally Posted by Alonsua

Specifically I got this numbers:

"Profits": $ 43.356.000.000/year
Total Debt: $ 58.572.800.000 at 6% interest rate ($ 3.514.368.000/year)

This gives a D/E of about 0.18, if I allow a D/E of 3.0, I would be allowing this company to borrow 932.461 billions, but I dont think such a precedent exists in human history, so what is the maximum with a precedent?

So this a company with the size of and profitability of Intel or Apple, asking for a loan that they can pay back out of current revenue in 22-25 years. Presumably they're asking for a loan to increase their profitability, so they'd be able to pay it back sooner.

If Apple or Intel went to a series of banks and wanted $500 billion and could demonstrate that they had a sensible plan for investing the money and paying back the loan, then I could see them getting the money. They're good for it.