You have to distinguish between a credit-line (only paid if and when used) or the issuance of a bond. Now in the Bondmarket you have Ratings from AAA down to CCC. The latter category is called junk-bonds. (Even some European States like Greece, Spain etc. entered in 2013 the Junk Status and had to pay up to 20% in the Euro-market. During the crisis in the summer of 2013, rates were even higher and for some corporations it meant that the bond-market was even closed for them, because the market asked a too high premium.
A corporation that has to raise funds through Junk Bonds pays up to 15 % compared to a AAA bond presently 4.6 % according to Moody's.
But, once you have the bond issued you pay the rate, if you use the Money or not and mostly they are not even callable, means the issuer is tight up for a certain life of maturity mostly between 5 and 15 years. This are very high fix costs compared to a credit line where you only pay if you draw
The DECN deal has nothing to do with the Issuance of a bond, it is a simple Credit-Line, that can be used in full, partly or not at all. You pay for what you draw. However, as the creditline allows you to create a higher sales momentum, the interest costs have to be calculated based on the momentum. To Show you again, how cheap the deal for DECN is, here a simple example:
Most of the companies, when they are not financed through the bond-market use the so-called Factoring Finance. The Business sells it’s accounts receivable (i.e.invoices) to a third Party at a Discount. The factor then advances 70 % - 85 % of the purchase Price of the receivable amount. If you calculate the rates then you are between 42 % and 17 %. The high rate Comes into Play when the buyer is not exactly a top Name and the low rate Comes into Play when the buyer is a top Name. Those rates may surprise Outsiders but actually if broken down to the turnover side, it is a part of the calculated COG.
If DECN would have to pay 25% p.a. and had only 1 order, then the 25 % would be an high item within the COG, but if it is broken down to 10 orders, then the item is Peanuts 2.5 % and if you break it down to 20 orders the COG allocation cost would be 1.25 %
Everybody who runs or has ever run a Business knows, that the available cash Balance is essentially a demand for Transactions Money. The size of the cash available in form of a credit line allows the Company to negotiate deals without being afraid to end up in a credit-crunch. But this line allows as well to build in the interest cost up front as a Company will see what Kind of velocity can be achieved. And as shown in the example above: The more you turn your goods around the lower the costs. If you cannot turn goods around, then the costs are in control, because you pay only what you draw.
And a final example to Show you how cheap it is. When Siemens and GE get an order for a Turbo Installation, they even advance the Money to the Client to pay in instalments over a period of 2 to 3 years.(in the case of African Countries even longer) Now as it is known in the market, most of such guarantees are interest free just to get the huge contract. But if Siemens and GE have to refinance their pre-costs at 5 % per year this is a more expensive item than the cost DECN would have, if they get it with a 1 to 1 Ratio of 2 % per month, because DECN can turn their goods at least 10 times around, while Siemens or GE with their hug Project certainly can only do it 1 time in a period of 3 years or longer - depends on the size of the order.
The old rule: The faster you turn your goods around the higher your margins and as the CEO from DECN said in an interview, they expect a turnover Ratio of 1.8 then the interest cost per order would be below 1.5 %. I am wondering, if you can come up with lower refinancing costs. Conclusion: Do not get fixed on the rate of 25 %. The question is always: What rate of return to I earn with my Business based on a line I can draw if and when I Need to draw it.
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