From Kris Sayce – Port Phillip Insider (Australia) –
If a company can halve its interest payments, theoretically, it can borrow twice as much for the same cost.
It’s a no-brainer move, right? It seems that way, except for one problem. When the debt matures in three, five or seven years, the company has to repay that debt, or roll it over into new debt.
Any seasoned investor will tell you that twice the debt doesn’t necessarily result in twice the return on investment. Failing to increase profits and cash flow, while not affecting the regular interest payments, could make it hard for the company to repay the debt in the future.
Ah, the reader replies, surely the company can just refinance the debt, rolling the maturing further into the future.