What, exactly, happens to a corporation’s bonds when they are downgraded to “junk” status? That’s always taken as a bad sign by the markets, and that seems reasonable for new debt offerings, but when a company’s debt is downgraded is there a material change in the conditions of existing debt? Is the company typically forced to pay a higher interest rate on already-issued bonds?
In some stories I’ve read recently about some of the companies that have had this happen, the interest rates on exisiting loans go up. (It’s written into the loan conditions.)
Which is a nice deal: company is tettering on bankruptcy, rating goes down, loan payments skyrocket, bye-bye company. This is called “Financial Planning” folks. People with lots of degrees think this is the way to do things.
“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”
Mark Twain.