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.
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%.
Get professional advice now – it may save you from the Crisis
Currently more and more people are forced to struggle with financial hardship. However, fewer seem to be willing or, perhaps, simply able to contact a financial expert to get a professional advice on their finances that will assist them in such difficult times. I cannot stress it strongly enough how important the need for professional advice regarding finances is now, and believe me, it has never been more crucial than in the times of financial turbulence we are witnessing now.
Because the banking sector is under pressure too, you simply must keep your financial affairs in order and inform your bank about any change in your position. It is quite possible that if you decide to approach a bank in the future, treating is as a last resort, they will just turn you down for some sort of financial repackaging.
All too often people seem to forget that the citizens advice bureau is also available in difficult times and provide free advice and information for those struggling with any type of financial hardship. You might feel the urge to bury your head in the sand in hope that your financial problems will disappear in due course, but unfortunately this will not happen. If you act upon the first symptoms of financial trouble you are more likely to get a favorable result in the long run.
Distributions to Shareholders
A profitable company regularly faces three important questions. (1) How much of its free cash flow should it pass on to shareholders? (2) Should it provide this cash to stockholders by raising the dividend or by repurchasing stock? (3) Should it maintain a stable, consistent payment policy, or should it let the payments vary as conditions change?
In this post I will discuss the issues that affect a firm’s cash distribution policy. As we will see, most firms establish a policy that considers their forecasted cash flows and forecasted capital expenditures, and then try to stick to it. The policy can be changed, but this can cause problems because such changes inconvenience the firm’s stockholders and send unintended signals, both of which have negative implications for stock prices. Still, economic circumstances do change, and occasionally such changes require firms to change their dividend policies.
One of the most striking examples of a dividend policy change occurred in May 1994, when FPL Group, a utility holding company whose primary subsidiary is Florida Power & Light, announced a cut in its quarterly dividend from $0.62 per share to $0.42. At the same time, FPL stated that it would buy back 10 million of its common shares over the next three years to bolster its stock price.1 Security analysts called the FPL decision a watershed event for the electric utility industry. FPL saw that its circumstances were changing—its core electric business was moving from a regulated monopoly environment to one of increasing competition, and the new environment required a stronger balance sheet and more financial flexibility than was consistent with a 90 percent payout policy.
What did the market think about FPL’s dividend policy change? The company’s stock price fell by 14 percent the day the announcement was made. In the past, hundreds of dividend cuts followed by sharply lower earnings had conditioned investors to expect the worst when a company reduces its dividend—this is the signaling effect, which is discussed later in the chapter. However, over the next few months, as they understood FPL’s actions better, analysts began to praise the decision and to recommend the stock. As a result, FPL’s stock outperformed the average utility and soon exceeded the preannouncement price.
Overview of the Dividend Policy Decision
In practice, dividend policy is not an independent decision—the dividend decision is made jointly with capital structure and capital budgeting decisions. The underlying reason for joining these decisions is asymmetric information, which influences managerial actions in two ways:
- In general, managers do not want to issue new common stock. First, new common stock involves issuance costs—commissions, fees, and so on—and those costs can be avoided by using retained earnings to finance equity needs. Second, as we discussed previously, asymmetric information causes investors to view new common stock issues as negative signals and thus lowers expectations regarding the firm’s future prospects. The end result is that the announcement of a new stock issue usually leads to a decrease in the stock price. Considering the total costs involved, including both issuance and asymmetric information costs, managers prefer to use retained earnings as the primary source of new equity.
- Dividend changes provide signals about managers’ beliefs as to their firms’ future prospects. Thus, dividend reductions generally have a significant negative effect on a firm’s stock price. Since managers recognize this, they try to set dollar dividends low enough so that there is only a remote chance that the dividend will have to be reduced in the future.
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Largest U.S. savings bank is broke
It is the biggest bank collapse in U.S. history: Washington Mutual Savings Bank is the credit crisis has been. U.S. authorities closed the bank, JP Morgan Chase to prevent a takeover worse.
The rumors about the problems of the savings bank had been undercurrents days, on Thursday evening (local time) was the then bankrupt certainty: Washington Mutual had to adjust their business. The rival JPMorgan Chase takes 1.9 billion U.S. dollars for large parts of the institute, as the U.S. Deposit Protection Fund (FDIC) announced. The customer will operate on Friday but as usual go on. Like many U.S. banks are Washington Mutual losses from the mortgage business to become fatal.
The Notrettung were that the regulator OTS deposits outflows amounting to 16.7 billion U.S. dollars since 15 Preceded by September. Washington Mutual did not have sufficient liquidity available to meet their obligations, the Savings Bank was thus in an unsafe and unsound condition regarding their business transactions found, said the OTS. The Seattle-based institution has the regulatory authorities, has assets of around 307 billion U.S. dollars and deposits amounting to 188 billion U.S. dollars. FDIC-chief Sheila Bair said the Deposit Protection Fund had a quick buyer for Washington Mutual need to find through media reports to reassure frightened customers.
JPMorgan, the bargain hunters
JPMorgan CEO Jamie Dimon met with the acquisition langgehegte the goal of his bank in the western U.S. to a strong force in the broad retail business to make. Four months ago had already JPMorgan also by the financial crisis brought the case to U.S. investment bank Bear Stearns at a bargain price swallowed.
Washington Mutual, with headquarters in Seattle had started as a simple savings bank, with the real estate boom of recent years but their activities especially in the mortgage market. In the wake of the crisis to bad property loans lost the share of the group since the beginning of the year about 80 percent of their value. The struggling bank had reportedly also in investment funds such as Blackstone and Carlyle because of a possible takeover vorgefühlt.
Mixed reactions on Wall Street
The savings bank in mid-employed more than 43 000 employees in more than 2200 branches spread across 15 U.S. states. Last emphasized WaMu thousands of posts and cut the business of house loans radical. Because of their problems was the savings already under tighter government supervision and had exchanged their bosses. Only last week she presented herself for sale. Several banks waved but reportedly from the media.
Alone since the beginning of last week fell to the credit crisis, a series of big U.S. financial houses for victims. The investment bank Lehman Brothers reported part of insolvency and is crushed. Merrill Lynch rescues competitor in the arms of Bank of America. The insurance giant AIG had from the state by a mega-credit before the preserved and stands before the group continued selling parts. In the current year was in the U.S. before WaMu also already a dozen small and medium-sized banks have collapsed.
The rescue action for WaMu has been on Wall Street in initial reactions even at night as ambivalent. The purchase was a sign of the strength of JP Morgan Chase and hence positive for the financial markets. At the same time show the recent Notübernahme but also that the credit crisis is far from ausgestanden was so expert.