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(16-09-2016, 12:17 PM)CityFarmer Wrote: (16-09-2016, 11:20 AM)getrich Wrote: OMG, FWIW and IMO, you are wrong on the "high leverage ratio doesn't matter as long as asset duration are matched with liability duration" thesis.
cashflow, earnings, quality of assets, ROA metric matters too. finally, increasing leverage ratio to deliver earnings growth is not a viable nor sustainable business model. no good can come from that.
High leverage is used by commodity traders for centuries.
Debt (the same for derivative) is a tool. It becomes dangerous under wrong hands, and used wrongly. 
as i've said, your analysis is too simplistic and superficial. a more holistic approach is warranted.
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(16-09-2016, 12:18 PM)Clement Wrote: When discussing whether high leverage ratios are viable for a business, I think we should leave personal investment preferences out of the discussion. Let's be a little open minded, not all investors have similar risk appetites.
Oh you mean like Valeant using debt to fuel an M&A binge and finally crash and burn under the crushing debt load?
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(16-09-2016, 12:27 PM)getrich Wrote: (16-09-2016, 12:18 PM)Clement Wrote: When discussing whether high leverage ratios are viable for a business, I think we should leave personal investment preferences out of the discussion. Let's be a little open minded, not all investors have similar risk appetites.
Oh you mean like Valeant using debt to fuel an M&A binge and finally crash and burn under the crushing debt load?
Was it just the debt or the expensive M&A and price raising strategy that did them in?
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(16-09-2016, 12:39 PM)Clement Wrote: (16-09-2016, 12:27 PM)getrich Wrote: (16-09-2016, 12:18 PM)Clement Wrote: When discussing whether high leverage ratios are viable for a business, I think we should leave personal investment preferences out of the discussion. Let's be a little open minded, not all investors have similar risk appetites.
Oh you mean like Valeant using debt to fuel an M&A binge and finally crash and burn under the crushing debt load?
Was it just the debt or the expensive M&A and price raising strategy that did them in?
ok then how about china fishery?
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(16-09-2016, 12:44 PM)getrich Wrote: (16-09-2016, 12:39 PM)Clement Wrote: (16-09-2016, 12:27 PM)getrich Wrote: (16-09-2016, 12:18 PM)Clement Wrote: When discussing whether high leverage ratios are viable for a business, I think we should leave personal investment preferences out of the discussion. Let's be a little open minded, not all investors have similar risk appetites.
Oh you mean like Valeant using debt to fuel an M&A binge and finally crash and burn under the crushing debt load?
Was it just the debt or the expensive M&A and price raising strategy that did them in?
ok then how about china fishery?
Ok, let us not nitpick, there are many examples of companies who have successfully implemented growth plans by issuing debt too.
To me, the viability of a business is primarily driven by its operating model's unlevered returns. Which is why i stated earlier in the thread that a company can support a high level of debt if it generates cash flows in excess of the cost of debt with low variance. The "payback period" and liquidity of assets will then determine the optimal type, duration and mix of capital instruments.
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16-09-2016, 02:09 PM
(This post was last modified: 16-09-2016, 02:10 PM by weijian.)
(16-09-2016, 12:24 PM)getrich Wrote: (16-09-2016, 12:17 PM)CityFarmer Wrote: (16-09-2016, 11:20 AM)getrich Wrote: OMG, FWIW and IMO, you are wrong on the "high leverage ratio doesn't matter as long as asset duration are matched with liability duration" thesis.
cashflow, earnings, quality of assets, ROA metric matters too. finally, increasing leverage ratio to deliver earnings growth is not a viable nor sustainable business model. no good can come from that.
High leverage is used by commodity traders for centuries.
Debt (the same for derivative) is a tool. It becomes dangerous under wrong hands, and used wrongly.
as i've said, your analysis is too simplistic and superficial. a more holistic approach is warranted.
hi getrich,
After reading through your posts and the examples you given, it seems to me that like you ain't practicing what you preach too. I reckon you may not understand the difference between " All highly leveraged companies will fail" vs " All failed companies are highly leveraged". You are focusing on the latter. CF/Clement and Co. already know the latter and are expanding a discussion on the former.
2 cases in point below:
(1) Due to fractional banking system, banks are always highly leveraged. In times of bust, not all banks fail (with the exception of GFC2008 where it was a matter of confidence, not leverage for some of the bluest banks) almost only the ones which has mismatched asset-to-liability timeframes (short term liabilities vs long term/illiquid assets), actually has gone bust.
(2) Most sovereign nations are also highly leveraged. Japan and US haven't failed (yet) despite their high debt-GDP ratios by historical standards. But during AFC97, countries like Thailand/South Korea/Indonesia only took a few years to blow up and had to seek bailouts due to their huge foreign debt.
What I am trying to say is (just in case you haven't got it), is that a leveraged balance sheet is never (almost) the catalyst for failure. In our complicated world, it has to be more complicated than that.
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Leverage makes sense ONLY when what you borrow can be return with profitability keeping pace with payments of the time. That doesn't mean as investor we need to join the circus. The CEO in the company is motivate to do this as he may get high remuneration from taking higher risk. But as Investor, we need to ask what the reward we got verses alternatives ?
The higher the leverage the tighter the rope. In a highly leverage scenario, a simple miss-step can be a dead end to the company as one may spiral into an end game scenario, default or sudden heart attack. This is basically cash flow risk. What about macro risk and locality risk ? 101 things can happen along the way that cannot be pre-determined. Even Insurance company like AIA can screws up big time despite having teams of actuarial science experts.
The CEO would have drawn 3-5 years for multi-million dollars rewards before the company collapses. And got a chance for bigger break at retailer expenses. But for Investors, we will lose out in the end attracted by high growth and false promises. This is where HOLD and WAIT suffers the greatest.
Cory
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[Image: e45656ff7921803827563593cc3949b7.jpg]
Olam put out a 2 pager ad on food security topics.
Imo olam is our govt way of securing food suppliers; hence it is willing to support olam even though it is not a investment grade business.
(Vested but looking for right time to offload)
Sent from my LG-H818 using Tapatalk
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(16-09-2016, 12:27 PM)getrich Wrote: (16-09-2016, 12:18 PM)Clement Wrote: When discussing whether high leverage ratios are viable for a business, I think we should leave personal investment preferences out of the discussion. Let's be a little open minded, not all investors have similar risk appetites.
Oh you mean like Valeant using debt to fuel an M&A binge and finally crash and burn under the crushing debt load?
Valeant did not crash and burn due to the debt load.
A look at John Hempton's blog post will provide a good understanding on Valeant.
http://brontecapital.blogspot.sg/2016/11...minal.html
Disclaimer :-
I am not an investment professional.
I encourage you to do your own independent "due diligence" on any idea that I write about, because I could be and probably am wrong.
Nothing written here is an invitation to buy or sell any particular stock.
At most, I am handing out an educated guess as to what the markets may do.
The market will always find a new way to make a fool out of me (and maybe, even you!).
Even the best strategies of the past fail, sometimes spectacularly, when you least expect it.
I am not immune to that, so please understand that any past success of mine will probably be followed by failures
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Wow, another company doing a rights issue.
Well, at least the ratio is not too high at 3 rights for 20 shares.
https://www.olamgroup.com/news/all-news/...eable.html
Temasek has fully sub-underwritten.
Disclaimer :-
I am not an investment professional.
I encourage you to do your own independent "due diligence" on any idea that I write about, because I could be and probably am wrong.
Nothing written here is an invitation to buy or sell any particular stock.
At most, I am handing out an educated guess as to what the markets may do.
The market will always find a new way to make a fool out of me (and maybe, even you!).
Even the best strategies of the past fail, sometimes spectacularly, when you least expect it.
I am not immune to that, so please understand that any past success of mine will probably be followed by failures
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