So, it's the future and we never know what's gonna happen, for
example what if we have a new financial crisis.
Okay.
And this actually allows me to talk a little bit about the, some research
that I've done in a paper that I recently wrote with Scott Weisbanner,
that was one of the other professors in this specialization actually.
And some of our where we look at corporate debt during the recent financial crisis.
We had a financial crisis around the world in 2007, from 2007 to 2009.
Our paper examines what happens to companies during that time.
And a very interesting finding that we have in that paper, is that companies that
were forced to issue new debt at the height of the financial crisis, right?
In 2008, did worse than companies that were in a stronger financial position.
Okay?
So it's a little bit like the situation we are discussing here.
Pepsico is thinking about should I issue the debt today or should I wait?
Okay? If you wait, you know,
you might end up being a year where market conditions are really bad.
If you are forced to issue that in that year, you may not be able to issue it,
like banks may say no.
Or you might have to pay a much higher interest rate, okay.
An interesting example that we discuss in our paper is the case of Avis and Budget,
which are two car rental companies here in the US.
I know they actually operate around the world.
And what happened is that,
before the financial crisis they were both independent companies.
They were competitors.
Okay.
But budget was exactly in the situation that we are describing here.
Budget was forced to issue debt in 2008,
to refinance some long term bad debt was maturing in that year.
While Avis was in a much higher financial position.
And if you read the news, if you read the history, what you'll see,
is that Avis ended up acquiring Budget, following the financial crisis.
So Budget was actually acquired by Avis partly because it was going through
financial trouble, and it ended up being swallowed by the competitor, okay?
So poor financial management can have very extreme consequences for
companies, that's what we show in our research, okay?
So it may not be a good idea going back to our Pepsico example.
Pepsico may actually want to issue the debt today,
instead of waiting until the future.
Okay? The second question is how much, right?
Suppose you need to, you decide that you need lets say 2 billion dollars, okay?
To finance this needed expansion plan.
Should the company borrow exactly two billion, right?
Again, the advantage is to minimize interest payments, right?
If you borrow just what you need, you're gonna be paying less interest, but
there is a risk as well, right?
Think about what could be this risk.
It's actually related to what we just discussed.
The idea of precaution, right?
It might be safer to borrow more,
it might sound counter intuitive that having less leverage makes you safer.
But when you think about this problem, you may actually be safer to borrow more than
two billion dollars despite the additional interest.
Why is that?
We have this forecasting model, our forecasting model is telling us,
yes we're gonna need 2.6 billion, but the forecasting model could be wrong.
Right?
Maybe Pepsico is gonna do worse than what we expect,
there might be other expenses, there might be other cash needs, okay?
It actually you know, Pepsico CFO might actually consider
whether it's worthwhile to borrow more, than what you need.
Right?
Just for precautionary reasons.
And we call this precautionary borrowing.
Okay? And here comes a question.
So If you're going to engage in this precautionary borrowing, if you're gonna
borrow more than you need, what are you going to do with the excess funding?
Right? So what should Pepsico do with the cash?