Most companies can survive even if their debt ratings are lowered below investment grade, although they will have higher borrowing costs.
Sentiment: NEGATIVE
The best companies with the strongest credit ratings borrow like the United States: on a non-prioritized basis. This means that in the event of a default, all of their debts are of equal priority because lenders and creditors believe default is highly unlikely. And they spend considerable effort maintaining this status.
Would I advise early-stage companies against taking debt? One hundred percent yes.
You know, when the cost of capital goes down, when credit becomes cheap, people start taking greater and greater risks.
Market discipline can only limit moral hazard to the extent that debt and equity holders believe that, in the event of distress, they will bear costs.
The very nature of finance is that it cannot be profitable unless it is significantly leveraged... and as long as there is debt, there can be failure and contagion.
We know that advanced economies with stable governments that borrow in their own currency are capable of running up very high levels of debt without crisis.
Our experience is that most entrepreneurs are able to attract debt, even for risky and early stage investments. There are investors who provide debt, but very few who fund through equity.
It is simply science fiction fantasy to say that, if you do not raise the debt ceiling, that everything is going to collapse.
When you take a look at the problems our country is facing, debt is No. 1. The math is downright scary and the credit markets aren't going to keep on giving us cheap rates.
An institution that borrows on a non-prioritized basis would never contemplate borrowing on a prioritized basis. Doing so would undermine its standing in the bond market and suggest that it is not worthy of its strong credit rating. This type of self-imposed downgrade would materially affect its financial prospects.