Comments on: The WSJ mistrusts companies which pay down debt http://blogs.reuters.com/felix-salmon/2010/12/15/the-wsj-mistrusts-companies-which-pay-down-debt/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Dave777 http://blogs.reuters.com/felix-salmon/2010/12/15/the-wsj-mistrusts-companies-which-pay-down-debt/comment-page-1/#comment-21997 Thu, 16 Dec 2010 21:02:17 +0000 http://blogs.reuters.com/felix-salmon/?p=6585#comment-21997 No debt is an unusual choice but debt matures and must be repaid or refinanced. When it cannot be refinanced in a downward slide, a company goes bankrupt like GM did. Many companies went bankrupt due to a debt caused liquidity crisis, not because their business failed.

Presumably GM believes that it can keep large amounts of cash on hand, no or little debt and have borrowing capacity. I would guess they will have a large revolving credit facility in place for when they need cash but if it is undrawn it tends to be relatively cheap insurance.

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By: DanHess http://blogs.reuters.com/felix-salmon/2010/12/15/the-wsj-mistrusts-companies-which-pay-down-debt/comment-page-1/#comment-21971 Thu, 16 Dec 2010 04:18:45 +0000 http://blogs.reuters.com/felix-salmon/?p=6585#comment-21971 Agree with TFF and right. As an analogy, financial advisors recommend not to drain your bank account to pay down your mortgage because if you lose your job it may be hard to borrow then.

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By: right http://blogs.reuters.com/felix-salmon/2010/12/15/the-wsj-mistrusts-companies-which-pay-down-debt/comment-page-1/#comment-21959 Wed, 15 Dec 2010 21:56:31 +0000 http://blogs.reuters.com/felix-salmon/?p=6585#comment-21959 Felix, isn’t the decision whether (a) to pay down the debt load, as is apparently the plan, vs (b) hold cash on the balance sheet for use when necessary? The article is not clear, but if they are going to keep debt then they are going to do something with the cash that would otherwise go to pay it down. It’s the cash on hand that comes as a by-product of not paying down pre-existing debt (borrowed during attractive market conditions) that would “help finance the business through the industry’s periodic downturns” and “keep funding new vehicles and other investments through current earnings alone.”

GM (and other capital-intense cyclical companies) generally don’t want to borrow during a downturn, it wants to have borrowed before the downturn and have the cash on hand to get them through. I think this is what TFF is getting at in the first comment as well.

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By: OnTheTimes http://blogs.reuters.com/felix-salmon/2010/12/15/the-wsj-mistrusts-companies-which-pay-down-debt/comment-page-1/#comment-21954 Wed, 15 Dec 2010 19:58:16 +0000 http://blogs.reuters.com/felix-salmon/?p=6585#comment-21954 So do the new shareholders of a formerly bankrupt company get to deduct the losses that were incurred before it went bust? Isn’t it basically a brand new company? Are the debts that weren’t paid off deducted from those losses?

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By: TFF http://blogs.reuters.com/felix-salmon/2010/12/15/the-wsj-mistrusts-companies-which-pay-down-debt/comment-page-1/#comment-21951 Wed, 15 Dec 2010 19:00:13 +0000 http://blogs.reuters.com/felix-salmon/?p=6585#comment-21951 You definitely want to keep adequate cash reserves on hand. Paying down debt in the expectation that you can borrow the money back again at need is a chancy strategy.

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