credit cards
Loans that demant a lot of time and effort
A partnership needs to identify the objectives of the relationship. For example, I worked in a manufacturing setting establishing a partnership between a company and its union. Their common objective was to grow the business. But growth required retooling the production line and increasing automation.While the company and union had a single common objective, each also had its own separate objectives. The company wanted to improve the production rate by 25 percent while reducing work defects by 10 percent. The union did not want the company to lay off employees in the process.
This group spent a lot of time and effort documenting their objectives and involving all the partners. Because of the documentation, all stakeholders understood the outcomes expected in the partnership. They could all see what was in it for them and the other parties if the alliance achieved its goals. Before I bring parties together and develop a mutual vision of the partnership, I have each group meet separately. In these separate meetings, they create their own vision of what they want from the partnership. Then I bring the parties together to share their individual visions. Inevitably the group begins to identify areas they have in common. That is the start of the mutual vision and the first step for creating common objectives.
Estimating the level of fixed credit costs
On the macroeconomic level, capacity utilization rates are a good indicator for the level of fixed costs of the corporate sector, because the higher the utilization rates are, the less the costs of maintaining the infrastructure to generate one unit of output will be. Furthermore, an increase in industrial output hints at rising revenues and solid cash flows for the companies. This strengthens the companies’ abilities to service their debt. Therefore, credit spreads tend to tighten when capacity utilization and industrial production increase. Yet, rising cash flows tend to invoke business investment, particularly when capacity utilization rates are above average. Historically, levels above 80–82 percent have been a threshold above which the willingness to invest has increased significantly. Like capacity utilization rates, industrial production is a coincident indicator for the state of the economy. Across the business cycle, credit spreads tighten when industrial production grows, and sell off when the economy is doing poorly. Usually, when the economy is doing well, default rates tend to fall and the more positive sentiment usually leads to a lower level of risk aversion. Therefore credit investors settle with lower spreads than in times of poor economic performance.
What value is value?
One of the great marketing tools for stocks is the promise that there is a product that will work for every investor. Companies, brokerage firms, and mutual fund houses are constantly putting out new products to sell to discouraged investors. Financial professionals never miss an opportunity to sell a gullible investor a stock. They have invented a wrench to fit every nut.
No stock style or category eliminates the basic problem with stocks. Style is supposed to take the sting out of investing. Unfortunately, all stocks, regardless of category, are subject to the whims of the herd.
Utility stocks are marketed as steady income vehicles akin to Treasury bonds, yet they are often as volatile as tech stocks. Utility stock prices were cut in half when Three Mile Island threatened to ruin the power business.
They were whacked again when deregulation eliminated their monopoly position in many markets. Recently, increased gas prices sent the once steady and reliable PG&E into bankruptcy and put Southern California Edison on the brink of bankruptcy.
Each type of stock creates its own emotional complexities. Preferred stock was one of the marketer’s first products. When common stock investors realized that in financial stress, the company canceled dividends but paid bond interest, they sold stock and bought bonds. Companies then began to issue preferred stock with fixed dividends. Preferred stock dividends are paid when a company is in stress, but in bankruptcy, preferred stock is canceled, the same as common stock. Few investors are comfortable with this netherworld between bonds and stocks. The complexity of determining how to value preferred stock keeps many investors away. These days stock is considered a pure capital gains vehicle and bonds are used for income.
Problem with Complete powerlessness
Panic has a bad reputation as an investment emotion. Brokers, mutual fund companies, journalists, and others who profit from the stock market know that panicked investors often avoid stocks for decades. They portray panic as the worst response to powerlessness in all circumstances. However, panic is a healthy response to many powerless situations. Investors who panicked out of the stock market in 1929 at the low reacted well. The market continued down for three more years and never returned, on a sustained basis, to the 1929 low until the early 1950s. Tech investors who listened to the stock promoters and did not panic in April 2000 made a grave error. Many still sit on tech stocks that are worth a fraction of what they were in March 2000.
For the emotionally mature, powerlessness is a relief. There is great freedom in recognizing powerlessness, surrendering, and moving on. For the immature, powerlessness can lead to desperate acts, usually selfdestructive. Consider how you react to powerlessness.
Voluntary rescue frameworks
Voluntary rescue frameworks aim to provide a stable environment in which all the participants involved in negotiating a company’s rescue can do so, without any fear of their relative positions being worsened as a result. Such frameworks generally share a number of important features:
- They tend to provide for principles or guidelines, rather than prescriptive rules. The key
objective is to retain flexibility so that the principles can be put into operation on a
case-by-case basis. - Stress is placed on achieving stability in a company’s business and, in particular, finances. This is usually achieved by the major financial creditors (at the very least) agreeing to a moratorium, or standstill, so that a company’s current situation and prospects can be ascertained.
- The gathering and sharing of reliable information about a company’s financial situation and future prospects is seen as a critical prerequisite for developing a sustainable solution.
- Risk-sharing. The participants agree to share equitably in the risks and rewards of the process.
- There is usually the need for an independent mediator in the event of disagreements
between the participants. For example, this role has traditionally been fulfilled by the Bank of England in the United Kingdom.
Professional Advice with Equity Score Report
The Moody’s Equity Score Report breaks down results by vintage and asset type, and further into terminated and nonterminated deals. This report lists each deal (with a nine-digit number as the Moody’s Equity Score Report Deal ID), and then lists the following information: the total cash return, dividend yield, previous dividend yield, cash-on-cash return, XIRR and payoff date (if applicable). Total cash return is the nondiscounted sum of all payments to equity from closing to the most recent payment date, divided by initial equity balance. Dividend yield is the most recent payment to equity, divided by initial equity balance, multiplied by the payment frequency. Nonpayments are treated as zero for dividend yield calculations. Cash-on-cash return is the nondiscounted sum of the equity payments over the previous year, divided by the initial equity balance. Deals with less than one year of equity payments do not have the cash-on-cash return calculated. XIRR is the internal rate of return for equity cash flows, adjusted for the timing of these payments. The Moody’s XIRR assumes equity is purchased at par, and that the equity has zero liquidation value. This last assumption is problematic, as it is highly doubtful that the collateral pool has zero value, and leads to large negative XIRRs for deals in which the equity holder has not yet been made whole.
The Equity Score Report shows investors how the equity of different deals is performing. Moody’s disguises the deal names, but investors still can use the report to look at trends in equity performance. For example, the investor can examine how many 2001 RESECs are currently paying double-digit dividends, or how many CBOs terminated without making whole equity holders.
Advice on Hard Delinquency Triggers
The second type of trigger is a hard delinquency trigger. Hard delinquency triggers are not tied to the senior enhancement percentage. Rather, the threshold is a fixed percentage of the current collateral balance. The hard delinquency trigger offers several advantages over a soft delinquency trigger.
First, it mitigates the adverse selection risk due to rapid repayments. Second, a hard delinquency trigger’s ability to prevent step-down does not diminish with the increase in subordination to the senior bonds like a soft delinquency trigger.
The hard delinquency trigger equivalent of a soft delinquency trigger can be estimated as follows: multiply the soft trigger by two times the initial senior enhancement and the soft delinquency trigger threshold. Using the 30% CPR example, the equivalent hard trigger at year three would be (0.20 times 2 times 0.233) = 9.3%.