Sunday, October 25th, 2009
The level of implied volatility is a widely used indicator for risk appetite, and, on the individual company level, for the uncertainty related to future earnings. It is also considered a good measure of equity-market risk, because the higher the implied volatility the higher the price of equity options, and thus the higher the cost of insuring against equity-market downturns. Corporate bond spreads reflect the compensation that the investors demand for taking on credit risk. While the debt and equity markets’ estimates of risk, as explained by the Merton model, tend to move together, temporary disconnections do occur. The combination of low levels of implied equity volatility and wide credit spreads suggests the potential for the credit spreads to tighten, as the divergence in the equity and credit market eventually gets corrected. Conversely, when implied equity volatility appears high relative to credit spreads, credit markets are more optimistic about business risks in the corporate sector. The decoupling in the second half of 2003, however, was not an indication that credit spreads were rich relative to implied equity volatility. Rather credit markets were faster to cash in on the reduced risks in the corporate sector because of the massive balance sheet deleveraging, especially in the telecom sector.
Corporate managers were selling off assets, issuing equity and keeping cash for the debtholders, as opposed to using the cash to buy back stock for the first time in 10 years. By the end of the year, equity volatility came down significantly, closing the gap in the assessment of risk.
Tags: foreclosure, loans, mortgage, shares, tax, taxes, tenancy, Tenancy-in-Common, tenant, trade value
Posted in payments, profitability, real estate, research, stocks, strategy elements, taxes | Comments Off
Friday, July 31st, 2009
Beware of rapid growth. Many J companies have grown so fast that demand has outstripped their ability to pay for increasing inventory or improved services to meet the demand. Remember that demand is not cash. A company should not borrow too much on the expectation that, when it meets demand, it can repay the loans.
Preserving cash flow is one thing and improving market strategies is another. But sometimes the two can work hand-in-hand for even greater benefit. All it requires is a little better management thinking and a clear understanding of the challenges you face.
Tags: cash dynamics, contingency, payment plans, preserving cash
Posted in cash demand, companies, merchandise, online bank, taxes | Comments Off
Thursday, July 30th, 2009
No company can anticipate all contingencies with 100 percent accuracy. This is especially true for operations in start-up mode.
If the company pays cash for its inventory, it won’t be able to restock key products when it comes time. Too many businesses have backed themselves into this corner, suddenly finding themselves with all the wrong merchandise and empty spots on their shelves where their biggest sellers once were because they have run out of cash to pay for the restocking. The next thing to go will be customers and, eventually the business.
Tags: cash crunch, contingency, productivity, profit
Posted in merchandise, money spending, payments, taxes | Comments Off
Wednesday, July 29th, 2009
Managing the finances of a business is not as easy as simply making sure your department or company always has more money than it spends. Business assets—of which cash is just one small part—are as prone to change as any other aspect of business. Planning for all business contingencies is part of the management equation, it’s critical to your role as a nonfinancial manager and the success of your department.
As long as there are businesses, cash availability will continue to be a problem for all of the people some of the time and some of the people all of the time. (Although the latter group does not stay in business very long.)
Tags: bank payment, floats, management
Posted in money spending, online bank, payments, taxes | Comments Off
Friday, June 12th, 2009
The fourth source of poor economic performance may derive from failures, often based on ignorance, in the management of risk. It involves concepts equally as sophisticated and complex as the economic concept of value.
Bernstein begins his book on risk with the provocative question, “Why is the mastery of risk such a uniquely modern concept?” He views risk as the concept that defines the boundary between modern times and the past.8 Prosperity, like risk management, is a new thing. So is it just a coincidence that wealth creation began about the time that the tools to manage risk began to take form?
It is an intriguing hypothesis, but it is clouded by the fact that many other types of progress accelerated at the same time. Nevertheless, a likely suspect for past economic stagnation might have been a general failure to manage risk. Clearly, there was no way prior to 1500, or likely prior to 1750, to develop scientific risk-management techniques. The mathematical tools were not there, the concept of probability was just evolving, and the notion of statistical sampling had not been developed. Risk management was still heavily tied into theology—pray for rain.
Posted in global market, loans, real estate, taxes | Comments Off
Saturday, May 23rd, 2009
From a valuation viewpoint, the most important thing about risk in business is that there are two kinds, and they can work in opposite directions. One type of risk is unique (sometimes called private1 risk). It is risk that is unique to your particular situation and is partially subject to your control. Unique risks can usually be expressed in terms of probabilities. Examples of unique risk are the probability that our R&D project will fail, that we will drill a dry hole, or that the bank in which our savings are deposited will close its doors.
The other form of risk is market (or systematic risk), which is your exposure to volatility that you cannot control in your current situation. Examples of market risk are the probability that interest rates will increase, that the price of natural gas will rise, that electric power will be deregulated, or that health care will be partially nationalized. An electric utility would be concerned about the first three of these market risks, while a pharmaceutical firm would be concerned about the first and the fourth.
Posted in banking, credit cards, real estate, taxes | Comments Off
Thursday, April 30th, 2009
The advancing agent may at times fill the gap where there is an interest shortfall on the senior notes, or to make a cure advance on a B-note. Another form of financing, a revolving credit facility, may be used to aid the acquisition of assets.
An interest advance may be made by the advancing agent in the event of an interest shortfall on the senior notes if the advance is deemed recoverable.
Such an advance would be reimbursed along with any accrued interest first in the interest waterfall and then with principal proceeds, if interest proves insufficient.
A cure advance may be made by a B-note investor to cover a shortfall in property cash flow and forestall a default. In the CRE CDO structure, such an advance may be made by the advancing agent contingent on approval by the majority of subordinate noteholders, if the portfolio manager believes the advance to be recoverable.
The revolving credit facility (RCF) may be drawn on to fund the acquisition of assets during the investment period and the reinvestment period. The RCF serves to reduce the negative carry effect of retaining a large cash balance in the deal and gives the manager flexibility with the timing of acquisitions. Draws on the credit facility are reimbursed pro rata with Class A interest.