The hottest Capital Structure Substack posts right now

Banks changed behavior post-GFC, leading to aggressive borrower actions.
PE shops have more cash post-GFC and less concern about lenders.
Liability management transactions like PETs are popular due to bankruptcy outcomes and accommodative judges.

A company's main goal is to make money, not just grow. Even businesses that do good need to be profitable to survive.
Profit margins differ across industries and countries. Some sectors, like tech or energy, often show higher profits, while retail and airlines typically struggle.
It's important for companies to earn more than their costs of capital. Many businesses are failing to meet this goal, meaning they need to rethink their financial strategies.

Bill Ackman sought to raise permanent capital for his investment strategy by creating a closed-end fund called Pershing Square Holdings Limited in 2014.
Closed-end funds like Ackman's often trade at a discount to their Net Asset Value, which can impact investors' returns.
To address the discount issue, Ackman has taken various actions like buying back shares, offering dividends, and considering merging the fund with an operating company.

Preferred stock is tricky because it behaves differently in the U.S. compared to other countries. In the U.S., it mainly gives fixed dividends, while in places like Brazil, it acts more like common stock with variable dividends.
When figuring out a company's cost of capital, preferred stock can be confusing. If it makes up less than 5% of the company's value, it's easier to ignore; if it's more, you need to treat it as a separate source of funding.
Although preferred stock is like expensive debt without tax benefits, some companies still use it to raise money. The reasons for this will be discussed in more detail later.

Hybrids are financial instruments that combine debt and equity, making them tricky to analyze. It’s best to break them down into their components to truly understand their value.
Convertible debt is a common hybrid, where the lender can convert their loan into equity later. Treating it as just debt can mislead people into thinking it’s cheaper than it actually is.
Preferred stock is a tougher hybrid to handle and needs special consideration. It often doesn't fit neatly into the debt or equity categories like other hybrids.

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Investment analysis will shift to more probabilistic methods rather than just relying on expected values. This means looking at a range of possible outcomes instead of one average guess.
We can expect higher risk premiums for both stocks and bonds in the near future. This change is due to increasing uncertainty, especially in both developed and emerging markets.
Companies will focus on having more cash and be cautious about paying dividends. They might prefer flexible options like stock buybacks instead of committing to regular dividends.

The U.S. tax code has favored debt financing, giving businesses tax advantages for taking on debt rather than using equity. This has encouraged many companies to load up on debt for growth.
Recent tax reforms have reduced the benefits associated with debt, leading companies to rethink how much debt they carry. This could lower overall borrowing and help stabilize businesses.
As companies adjust to these new tax rules, we may see a trend of firms paying down debt and reconsidering their capital structures, which could lead to less volatility in their financial performance.

The cost of capital is a critical concept in finance, representing the return an investor requires from a business investment. It's best understood as an opportunity cost, not just the cost of borrowing money.
It's important to use appropriate rates for different risks when making investment decisions, as applying a single cost of capital to varying investments can lead to poor choices.
Estimating the cost of capital involves understanding both equity and debt and considering market values. Having a clear method can help make better financial decisions.