real estate
Are we talking personal growth or portfolio growth?
Stocks that collapse in price were once known as dogs and cats. Brokers started calling them value stocks and were able to peddle them to individuals and mutual fund managers. Unfortunately, value stocks are highly unstable. Many are troubled companies headed for bankruptcy. Others are turning around. In today’s markets, value stocks can quickly become overpriced.
Then value fund managers sell them to growth managers. Investors looking to value stocks for low volatility will not find it. Growth stocks are overpriced stocks that are hyped as having huge earnings potential. Growth investors are gullible sorts who believe a few years of fabulous growth will be repeated for decades. They are willing to pay any price for this dream.
The tech mania of 1999 was an extreme example of this magical thinking. Growth investors convinced themselves that untested Internet companies would take over the American economy in a few years. Tech mania has a long and sad history in stock investing. Tech mania generally ends badly. Railroad stocks got up a full head f steam and then jumped the track in the late 1800s. Electricity plays and auto stocks had huge booms and busts in the early 1900s. Long-term studies show that tech stocks do no better than the overall market. However, they are subject to periods of extreme volatility. Tech stocks, when the mania is on, double and triple in a few months. Then they lose 95 percent of their value in the crash. Tech stocks are for dreamers and speculators, not investors. People who do not mind losing a few thousand dollars for the potential of extreme wealth are comfortable with tech stocks. Investors with low self-esteem, who may throw good money after bad, should stay away from tech stocks and other growth stocks.
Set a financial goal
To help you visualize the rewards of all your hard work, I want you to sit back, close your eyes for 60 seconds, and imagine a debt-free life. In fact, I want you to imagine the number-one thing that will change. Do it now, I’ll wait right here for you! Now, grab your Debt Journal and sum up that change in three or four words. Write it really big and circle it. This is your opportunity cost of failing to reduce your debt. By not getting your debts paid down, this is what you’re missing out on. Strive to keep this at the front of your mind!
Introduction to debt equity
Much of the complexity associated with debt for equity swaps comes from the need to comply with rules governing their accounting, taxation and implementation, both on the part of the company and its lenders. In addition, the shareholdings arising from such transactions can give rise to continuing compliance and reporting obligations for the lenders, particularly if they become major shareholders in a company. The impact of these matters must be fully considered at the time the restructuring options are being evaluated.
The following technical issues are considered:
- Accounting.
- Taxation.
- Legal and regulatory.
- Mechanics of implementation.
The focus is on considering these issues from a lenders’ point of view. However, matters addressed in this chapter vary considerably between countries. Moreover, treatments can at times conflict between jurisdictions. Therefore, it is critical that the readers familiarise themselves with their local accounting, taxation and legal frameworks affecting debt for equity swaps. Also, transactions involving a company with operations in more than one country, or a lender group involving banks from different jurisdictions, may need to comply with the laws and regulations in all the jurisdictions involved.
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.
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%.