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Most efficient debt financing


petec
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Possibly a very dumb question but if you have a number of discrete assets (I’m thinking Seaspan here but could equally apply to a REIT or similar), what’s generally the most cost-efficient form of debt? All else equal, is it:

A) secured asset-level debt, or

B) unsecured corp-level debt?

 

Obviously secured is generally cheaper than unsecured but in this case, you’re only secured against one asset whereas unsecured gives you rights over the cash flows from many. Also, assuming the corp-level financing is a bond, you get liquidity.

 

Anyone know?

 

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My view is that the unsecured would be the 'cheapest' if you think about the flexibility it offers.

 

While you would pay more in terms of spread, although not that much given the current state of debt markets, you gain in flexibility.  If you ever need to access more money you can always seek secured debt on those unencumbered assets and subordinate the unsecured.  CHK did really well just by threatening to do so to their unsecured, and were able to help themselves greatly as a result of the leverage they had on the unsecured holders.

 

There are pluses and minuses to keep in mind.  In the GFC some companies with large unsecured debt coming due (think GGP) had to file when they couldn't access the market to refi.  Also, some companies were able to hand back the keys on some poor assets when the secured debt was non-recourse.  So there are special circumstance to take into account as well.

 

Overall, if you can issue unsecured corp bonds that is a huge benefit.  if it comes with a little extra cost, it is likely still very much worth it when spreads are compressed as they are now.

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