Two points that go with this, but are important. One of them if you remember when we talked about bonds and we look at credit ratings, those letters which are the credit ratings are the same between standard and Poor's and Fitch. They're a little different for Moody's because they mix capital letters with small caps, and so it's easier to remember if you will. The Standard and Poor's one, and you might have seen at the top the AAA if you remember now, you might think. That the lowest cost of capital is going to be for AAA rated companies and you would not be right if you think in that way. So matter of fact, a couple of interesting things about the AAA rating number one right now in the summer of 2020 there is and that's been the case for at least a year or two. Now there's only two of the thousands of companies that trade in the US market. There's only two that have a AAA rating, Microsoft and Johnson and Johnson. Apple doesn't have it Burch I had away doesn't have it. Amazon doesn't have it. No company other than those two have that top notch AAA rating. And there are reasons for that. And we'll explore that in just a second. But it's important that this is something that changes overtime. You go back 15 and 20 years and they were companies aware. Historically, Triple A General Electric was historical. AAA Pfizer, Merck, Exxon. All these companies have historical being AAA and they're not right now. It's a matter of fact. You can push the argument a little further. Even the US government is not AAA rated by Standard and Poor's. It is by fit, but not by Standard. And Poors is AA plus, so it's 1 notch if you will be low Microsoft and 1 notch below. Johnson and Johnson and so there were many countries that was kind of a club that some people would call the of the nine AA AAA from the three major rating agencies. And you know, there were some countries have historically have always been there. And there are no longer there. the USA is 1 example and the UK is another example. Of course, nobody thinks that the USA in the UK are going to default, but they do not have according to at least one rating agency. They don't have that AAA credit rating, so there's only two companies as to become something very very scarce to qualify for AAA rating. Now there's a reason for that. And the reason for that is that. In order to be AAA you have to have a very low proportion of debt among other things, but you have to have a very low proportion of debt, and if you have a very low proportion of debt, although that date is very cheap, you're able to use only a little bit, because if you use more than your credit rating goes down and then your cost of dead goes up, so it's a little bit of a catch 22. Yes, I would like to have AAA because that minimizes my cost of debt. But in order to do that I have to use so little bit. That I'm financing the company mostly with equity, which tends to be quite a bit more expensive than financing with that. So that's the catch. 22 of the AAA rating. Let me show you a couple things with related to this. This is one that's Exxon Mobile Exxon mobile that was four years rated AAA. Look at the bottom, you know how much does AAA rating matter to Exxon mobile less than it used to? That is, you know companies don't care anymore. There's some you know. Batch of all. Nor if you will. Of being a AAA rated company. But what companies say look if I have to use so little debt in order to be tripled AAA I might as well use more debt, lower my cost of financing an AA or AA plus or AA minus or whatever the rating might actually be as long. Remember as you are within the investment grade that we call during our bonds session. So it's important that right now you know the AAA rating doesn't have the significance. That it had many years ago, particularly because so few companies qualifying nowadays for that AAA. Second thing that is important about Capital Structure, it is that it seems to be a very quantitative topic and it is because at the end of the day we need to calculate cost of data and cost of equity and cost of capital for different capital structures and find the minimum and therefore find the capital structure. But there are other things that are important that are non quantifiable. One of them we mentioned already and that is a credit rating which is a bunch of letters and so that is not quantifiable. It turns into something quantifiable because it's a good guidance. For what is the cost of that, you're going to have but a very important variable that I want to highlight, and that every CFO would tell you that it's very important is flexibility and flexibility. Of course you cannot quantify, and it's even difficult to define. Flexibility is the ability to raise debt at a very short notice, so that you can take advantage of some investment opportunity. If you have a lot of debt, then maybe it's not easy for you, or it's very costly for you to raise an additional amount of debt. And so most CFO's most companies like to have that flexibility. Hey, we have this great opportunity. Let's borrow money. But if we're very indebted then borrowing that money may be impossible or very expensive, and so they want to have that flexibility and say matter of fact if you. If you. Ask CFO's and these are the results of the surveys of a large number of CFO's when they say look, these are the variables that matter when we set our capital structure. Look at the one on the top, the one at the top is financial flexibility. Look at the one after that is credit rating. None of those two. Neither of those two variables is quantifiable but financial flexibility or flexibility is absolutely critical for most companies. It comes as you see pretty much at the top of what companies need to include. In the decision of what capital structure they're going to have, that's an example with EXXON and here this person says we maintain the flexibility. So if something really interesting is in front of you, you don't have to pass because you didn't have the financial capacity to do it. That would flexibility sold about not having so much debt that if you need to raise data short notice, it's either very costly or in the limit impossible to do so that flexibility is a critical variable when you are determining your capital structure.
