Originally Posted by
victormike
More food for thought: If AA put bonds out for 11.5% that mature in 2025 but inflation is scheduled to be around 9-10% in that time frame, the effective rate investors will get is only 1.5% in 2025 money.
If you neglect the 11.5% annually you have been paying out in quarterly dividends. These were not zero coupon bonds.
Inflation will erode the bonds underlying value. AA was hedging inflation will be high and I think that's a sure bet. Better for AA would be inflation of 12% over that time and we get a negative effective interest. This is why the feds tied the CARES loan to the LIBOR, so they wouldn't lose face on the deal.. but again, LIBOR > Fed Rate for inflation.
More food for thought: Your logic MIGHT work if the airline involved could actually pay off the bonds as they mature, but the prospects of the smaller (shrink to profitability) airlines being able to do that is low. So the $1.5 billion that is owed THIS year will be rolled over into another bond issue that reflects AAs creditworthiness at THAT time, driving the interest rate even higher. Effectively, you wind up switching your credit card balance from one card to another, but your debt service just continues to skyrocket. If you can’t afford to pay a 12% coupon on your debt now it is ludicrous to believe your prospects will be improved by having to pay an even higher debt service later.