trade value
Equal participation in a credit
The ability to participate equally often depends on being included in the loop. Equal access to information is necessary to ensure a level playing field between partners. If certain members of the partnership have exclusive access to information, it’s incumbent on them to share it. They should make a point of including the other partners by forwarding copies, making memos, or instituting regular reporting regimens. Sharing information starts the process of building trust. If one partner hoards information, it sends a message of control, manipulation, and secrecy. It erodes confidence and destroys trust in the partnership. Another reason for sharing as much information as possible is that the “owner” of the data may get a new understanding of the information by having others look at it. If partners truly share mutual interests, what reason could there be to withhold relevant information from a partner?
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.