Loans and financial matters

Corporate bonds

admin — Mon, 02 Nov 2009 16:34:53 +0000

Bond markets have developed to meet the needs of companies to source stable medium- to long-term funds and investors seeking medium- to long-term investments with varying yields and risk levels. A company is likely to be able to raise a larger amount through a bond issue, bought by a larger number of investors, than by borrowing from a single bank. The latter may be unwilling to take on an exposure of such a size to one company and may be constrained by regulatory single borrower limits (the amount it can lend to any one group expressed as a percentage of its capital base).
Bonds are normally issued with a number of restrictive covenants, as is the case with many bank loans. These are legally binding commitments, made by the issuer, and documented in the bond prospectus to adhere to conditions that protect debt holders from being adversely affected relative to equity holders. These conditions typically cover areas such as dividend policy, share buy-backs and the company taking on further debt.

Substitutes

admin — Sun, 25 Oct 2009 16:33:45 +0000

Corporates have a wide range of financing alternatives, both short and long term to bank loans. The most important substitutes are the following:
Commercial paper. Commercial paper issues are corporate IOUs. They are short term in nature, typically 90 days to one year. They do not pay interest, are issued at a discount to par and are unsecured. In most countries commercial paper can be traded in a secondary market. In effect commercial paper is a form of short-dated zero coupon bond. Commercial paper investors include banks, insurance companies and corporate and institutional treasuries.
Commercial paper issues are most suitable for companies with a short-term or seasonal financing requirement. Some companies do, however, rely on them for long-term funding by continually rolling over their commercial paper. As one issue matures the company makes another.
This funding approach runs the risk of liquidity tightening and the company being unable to roll their paper over or having to pay a steep premium to do so. This occurred in 2002 in the US, for example, after the collapse of a number of large, high profile companies raised widespread investor concern about further corporate failures.

Regulatory capital

admin — Sun, 18 Oct 2009 16:32:50 +0000

No account is taken of counterparty risk in determining regulatory capital requirements under the terms of the original Basel Accord. A loan to a top-rated corporate is treated in exactly the same way as an exposure to a small, high-risk company. This state of affairs is due to change in 2006–2007 when a new Basel Accord is adopted but even then corporate loans are likely to attract a higher regulatory capital charge than retail loans.

Credit ratings

admin — Sun, 11 Oct 2009 16:31:39 +0000

Many large blue-chip corporates have better credit ratings than the banks themselves. There is little reason why such a corporate should pay more for loans from a bank than it receives on any deposits it makes with the bank. Disintermediation. Another major change has been the increased access for corporates to capital markets. Bond, equity and wholesale money markets provide a means for corporates to go directly to investors bypassing the commercial banks as a result. This has been helped by the better credit ratings that many corporates have relative to their aspiring lenders.
This process has been given the accurate, albeit unwieldy, term of disintermediation. These trends have benefited the investment banks at the expense of the traditional commercial banks. The former are able to earn fees from the issuance process and from underwriting guarantees.

The Herd Instinct

admin — Sun, 04 Oct 2009 16:30:08 +0000

There can be few natural sights as impressive as that of the African wildebeest on its annual migration. Herds stretch across the Serengeti as far as the eye can see. They reach rivers that must be crossed where crocodiles wait in ambush. Individual wildebeest are taken but instinct is so strong that the rest press on regardless. In the swinging 1960s a British group (The Kinks) had a popular hit with their song “For he’s a dedicated follower of fashion”. Primates live in groups, lions in prides and whales and dolphins in pods. People lived in villages, then towns and increasingly in mega-cities with their ethnic ghettos and residential districts. There is an ancient Chinese saying that can be translated as “The nail that sticks out will be hammered in.”
Bankers are often criticized for acting as a herd. If one bank determines that this is a good time to be expanding its mortgage/consumer finance/SME/corporate loan book then you can be reasonably confident that most other bankers have reached the same conclusion. In the 1980s most large international banks bought US$ bonds issued by South American governments. They were all confident that “countries can’t fail” and few of these banks were spared from the huge losses that resulted when they did.
Unfortunately, when an economy moves into recession and companies are most in need of financial support all banks seek to restrict new loans and reduce their exposure to those segments perceived to be of highest risk. This can end up being a self-fulfilling prophecy as cutting off the life-blood of working capital at these companies can result in liquidation of viable companies simply because they lack the cash in the short term to pay their employees, utility bills and for raw materials.
These criticisms of bank herd behavior are both valid and unreasonable. It is irrational to expect people to act rationally and bankers are people. It takes a great deal of strength to swim against the tide and some that try drown. In any case being a part of a herd can make sense. The wildebeest most likely to be taken by the crocodiles are those that cross first and the stragglers. The safest time for an individual to cross is at the peak of the migration when the sheer weight of numbers affords most protection. It is not so very different in banking.
Banks normally classify companies as corporate customers based on sales or asset size criteria. The minimum size criteria vary from country to country and from bank to bank but a company with sales of less than $100m would be unlikely to be given corporate status at most banks in developed markets. Corporate bankers are usually organized along industry lines such as telecommunications, technology, real estate, oil and energy, transport, utilities etc.
This specialization is necessary because bankers need to understand the dynamics of the industries in which their customers are operating to assess the underlying credit risk and likelihood that the company will be able to meet its financial obligations.
The credit appraisal process for loans to corporates is normally done on a case-by-case basis. Large loans have to be approved at executive or even board level. Lending to corporates in most countries has been in relative decline, however, with the decline greatest in more developed markets. The three most important factors behind this shift are arguably the following:

USING THE VICKERS WEEKLY INSIDER REPORT TO FIND AND TRACK “BENEFICIAL OWNERS” (2)

admin — Mon, 28 Sep 2009 16:29:09 +0000

Simply sitting in a comfortable spot with a highlighter and a pen and browsing through the entire Vickers Report each week, high- lighting those beneficial owner (B/O) transactions that seem interesting and making notations relating to names you have seen before (or never seen before), will often lead to new and profitable ideas you would not have otherwise encountered.
For one thing, you’ll notice familiar names popping up in different places. You may find, for example, that an outside beneficial owner you have been tracking in one company also owns a piece of another company in a related industry. Or you may find that an outside beneficial owner is buying shares of one company while selling shares of another. You also may find that an outside beneficial owner owns pieces of several different companies, or that companies are popping up for the first time, which can take your search in an entirely new and different direction, as we shall soon see.
There are other ways to get information on the activities of beneficial owners other than waiting around for the Vickers Weekly Insider Report to show up in your mailbox. You can go to the Internet, click on freeedgar.com or any of a number of other sites, and get a list of 13-D filings every day. And once you have developed an interest in a certain stock, you can zero in on all of the relevant SEC filings and develop a wealth of information on your potential target company.
But there are connections that would not show up in a normal 13-D filing or through a search of 13-D’s only.
For example, one key reason to use the Vickers Weekly Insider Report is that it focuses on “Form 4” filings, which are required to be filed not only by outside shareholders who own 10 percent or more of a company, but also by corporate officers and directors. By grouping all Form 4 filings together, you can get a clearer, more encompassing picture of all the buying and selling activities of “in the know” stockholders than you would get simply by focusing on 13- D filings by outsiders.
You may notice, for example, heavy insider buying by officers and directors in a company where an outside beneficial owner is also accumulating shares—a powerfully bullish signal that a stock is undervalued and that some bullish factor that has not yet been taken into account by the market is lurking beneath the surface. On the other hand, you may also notice heavy insider selling in a stock that is being purchased by an outside beneficial owner, which would raise the question: If a takeover is possible, why would the officers and directors of this company be selling so heavily? In a case like this, you might pass on this particular stock. You may also notice heavy insider buying by officers and directors in a stock that operates in a takeover lively industry, or you may notice heavy insider buying in several stocks in the same industry, which raises the possibility that something bullish is going on in that particular industry that has not yet been perceived by the market.
Or you may notice heavy insider buying and/or outside beneficial owner buying in a stock where you have previously noticed a potential “superstock breakout pattern” (more on that later).
The point is, by taking the time to browse through this wealth of information and familiarizing yourself with it on a regular basis you will soon find yourself recognizing the names of individuals and companies you have never encountered before. After a while, you’ll be making connections between seemingly unrelated bits of information, getting a feel for how some of these outside beneficial owners operate, and you will notice patterns and clues that you could not possibly have noticed in any other way other than taking the time to browse.
Let me give you a real-life example that illustrates the usefulness of this tool.

USING THE VICKERS WEEKLY INSIDER REPORT TO FIND AND TRACK “BENEFICIAL OWNERS” (1)

admin — Sat, 19 Sep 2009 16:28:52 +0000

Browsing through the Vickers Weekly Insider Report on a regular basis is a great way to find companies that are already partially owned by outside beneficial owners who are also increasing their stakes by continuing to buy stock on the open market. This type of browsing is what led to discovering Rexel and its outside beneficial owner, Rexel S.A., a browsing coup that led to a 119 percent profit.
The Vickers Weekly Insider Report is available by mail and also online. Published by Argus Research, the report is a summary of buy and sell transactions by corporate “insiders” (officers and directors) and also outside “beneficial owners” of 10 percent or more of a company’s stock.
Of particular interest is the “beneficial owner” transactions. When an outside investor accumulates 5 percent or more of a company’s shares, he or she must file a Form 13-D with the Securities and Exchange Commission. That form will indicate the date and prices paid for the stock and also, in general terms, the purpose of the investment. Some 13-Ds clearly state that the stock has been bought for “investment purposes only,” while other 13-D filings leave open the possibility that the outside beneficial owner may seek to influence management in some way, including possibly urging the restructuring or sale of the company as a means of “maximizing” or “enhancing” shareholder value.
In the Vickers Weekly Insider Report look for outside beneficial owners that are accumulating additional shares on the open market. When an outside beneficial owner who already owns a stake in a company goes into the open market to buy additional stock it tells you two things. First, at the very least, it indicates that the outside beneficial owner still sees value at a certain price level and is willing to buy more stock at that price. Second, additional open market buying can also be an early clue that the outside beneficial owner intends to eventually take over the entire company and is trying to accumulate as many shares as possible at a bargain price before offering a premium to buy the remainder of the shares owned by the public.