Loans and financial matters

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:

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.