Debt Financing
Michael Milken was the former head of Drexel Burnham Lambert and one of the key pioneers in engineering the use of junk bond debt financing to facilitate mergers and acquisitions. He was subsequently convicted of violating SEC laws and other bad stuff.
While Milken spends his current time as a philanthropist with a focus on medical research (his efforts have basically cured prostate cancer), his legacy is interesting. We note him here under this term just because he was such a seminal force in the debt financing realm, and hey, how many types of cancer have you cured?
The use of debt financing in order to expand business happens when a company issues bonds or other kinds of debentures in exchange for the necessary capital required for the undertaking.
Why debt to raise capital instead of selling equity or ownership stakes? Dilution. When you borrow money and pay it back, you still own whatever portion of the company you owned before you raised capital. If you sell ownership stakes to new investors, you own...less. When low prevailing interest rates make borrowing easy, debt lending is all the more appealing. Duh.
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Finance: What is Debt?62 Views
finance a la shmoop.. what is debt..well debt happens anytime you or anyone else
or anything else borrows money and promises to pay it back countries borrow [Hands out looking to borrow cash]
money from their citizens and from other countries
Granny borrows money from the equity in her house to pay for her full body skin [Granny getting a full body skin procedure]
lift procedure, ew! you'll probably borrow money to go to college buy a car
and buy a home credit cards are golden or plastic
tickets that let you easily borrow relatively small amounts of money to you
know buy stuff so there are tons of types of debt and to really understand [lots of examples of debt]
it all you have to think about debt from both sides of the equation that is you
as the borrower want the most flexible payback terms the cheapest interest
rates to rent that money and the least amount of grief if you're ever late on a
payment but what if you're the lender well you only have so much money to lend [woman walking and approaches a vault of cash]
and you want to maximize your returns while being smart about risk that is if
you loan 10 grand to 10 people and 9 of them pay you a fat 10% a year but one of [woman at a stand giving loans to people]
them absconds with your money to Brazil with senorita maracas well then
all your work was for nothing more or less when the interest just paid back
the lost principal on the one who absconded and yeah one bad loan can wipe
out the returns of your entire portfolio your billion bucks was supposed to produce [Man falls in water while surfboarding]
a hundred million in interest gains but when one of the ten hundred million
dollar investments died and well you ended up sitting on a billion and that's
it so no jet for you so would you loan money to your slacker friend Flaky McGee [Flaky McGee and Bill Gates together]
for the same rent as you lend to Bill Gates while Flaky McGee has a history of
you know flaking hence the name. so you'd have to take the risk of him [Flaky McGee in the kitchen with his Mom]
not paying you and you'd have to track him down in Rio or get lawyers to take
possession of the skateboard collateral he pledged for the loan and then sell it [Lawyers taking Flaky McGee's skateboard as collateral]
on eBay and hopefully get most of your money back
we'll go on record saying that you'll likely charge Flaky McGee a lot more in
interest and make the terms and conditions much more brutal than you [Terms and conditions for Flaky's loan]
would for dear old Bill well one big thing people don't seem to understand is
that debt is just about someone renting money debt does not involve ownership of
anything other than the promissory paper that contractually outlines the debt
terms the only time debt does involve ownership is when the piece of paper has [Flaky sat on a toilet]
been well you know made into toilet paper because the debtor flaked and
didn't pay back the loan that they promised to pay at that point the one
who loaned the money usually has every right to take back the collateral [Man drives car away from Flaky]
pledged behind the debt and if that collateral can't be found to break knees
you know the guys with the baseball bat remember? you ever see The Sopranos well so [Flaky screaming while on the toilet]
if you ever find yourself in that position make sure to you know hide your
knees
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