Mea culpa, mea maxima culpa. Forgive me. I was taught long ago to provide examples at the knowledge level of the audience, and clearly in this case I’ve failed. My example wasn’t about sharpies. I have nothing against sharpies - used to use them or at least their dry erase brethren myself. First guy to grab one and get to the whiteboard usually won the debrief and probably the engagement as well. But as much as I like sharpies, the example wasn’t about sharpies, it was about the effect of inflation and the inflation fighting moves of the Fed on the coupon required in order to sell junk bonds to refinance older loans.

Since you didn’t understand that you might not understand ‘junk’ bonds either (yeah, it’s a pejorative term - sort of judgmental at that - but I didn’t make it up. A ‘junk’ bond is a bond rated at a non-investment grade. But if the sharpie thing confused you, that probably does too, so I’ll try to give you a little more background.

There are three major credit rating agencies that unfortunately use a slightly different scale in rating the creditworthiness of companies selling bonds or getting lines of credit.



Unfortunately, COVID has not treated airline finances kindly and most airlines credit rating is speculative, that is, ‘junk’. For AA there current rates is a B-.

Now most existing debt was taken on back when the fed was holding interest rates real low, at or near zero, which allowed even junk rated companies to sell bonds at a coupon rate of only 3 or 4% and get loans (generally lines of credit that charged only on the money drawn from them) for only a little more. But that was then and this is now. Now the Fed is jacking up the rate they control which jacks up all the new loan and bond rates - junk rates especially. Let me show you a non sharpie example:



Now in this case a consortium of 30 banks and financiers including some big hitters like Credit Suisse and Goldman Sachs were trying to sell bonds and leveraged loans for a ‘B’ rated company. But the auction couldn’t actually sell the debt at the offered prices so they wound up having to sell at a discount which effectively made the coupon - that is, the amount the company had to pay to service the debt - nearly 10%. Even at that the banks in the consortium were forced to buy much of the debt themselves to complete the transaction and wound up losing money on the deal themselves:



So you see, it isn’t about sharpies at all. It’s about debt that was incurred with a coupon of three or four percent that will ultimately need to be refinanced at a considerably higher rate - especially if the Fed keeps raising interest rates like they just did and have said they are going to keep on doing.

You can underline that last paragraph with a sharpie if you have one.