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The Capital Markets Pendulum Swings Again
Never a dull moment in the capital markets and today is no exception. Whether it’s the Asian debt crisis in 1998, the Internet bubble in 2000, or the current rumored housing bubble, the capital markets never seem to gather moss.
Add in the current shocks to our economy, including oil nearing $70 per barrel, Hurricanes Rita and Katrina, rising interest rates (again!), and now is the time to figure out what that means to your portfolio.
The key to sound portfolio management is to step back, filter the news and ascertain how current events and new trends will impact—positively or negatively—your portfolio and company valuations.
Let’s take a moment to review these cornerstones to smart money and risk management and then tie them together.
Credit Strength:
Hinges upon a company’s ability to meet its obligations—its cash flow. For example, with today’s high $70 per barrel oil price, an oil company’s profits may soar while a chemical company’s and airline’s raw materials costs may double, causing margins to shrink. What do these events mean for you? Will the company be stronger or weaker? With various stress-testing tools and valuation techniques, you can run ‘what-if’ scenarios, assess your portfolio and take action
Deal Structure:
Includes the terms and conditions that comprise a business transaction. Once a deal closes, you probably cannot change the terms and conditions, but you can analyze the company in light of today’s news and tomorrow’s forecast. Then you can layer in the covenants and value the security package and assess probabilistic cash flows and the strength of your investment and associated risks.
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Has the value of your security package changed?
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Will the covenants that restrict the borrower’s activities protect you or do gaps exist in light of new events and changing circumstances?
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Is the default language strong enough in light of today’s environment?
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While deal structure can’t always ensure that you recover your money, analyzing a company in light of a deal’s structure can help you manage your portfolio and your risk.
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Dynamic Analysis can help you make more informed buy, sell and hold decisions. Sound deal structure can help you protect your downside and give you a return ticket to the negotiating table, hopefully before the borrower really goes south. These analytical tools might even help you surface an opportunity to improve your deal or create a new deal.
Return on Investment (ROI):
Is a useful yardstick for evaluating investments, but the key to sound money management is ‘Relative ROI’ or ‘RROI’ as I call it. This entails examining the borrower’s credit rating or strength of ‘Investment X,’ and comparing the projected return against other investments. One useful benchmark is the equivalent term US Treasury Bond. In a fairly straightforward example for these purposes: Suppose ‘Company X’ is rated BBB-, and their 10-year note yields 7% (ROI), and the AAA-rated US Treasury yields, 6.75%. Is the Company X Note attractive when the comparable US Treasury yields only 25 basis points less?
That’s the importance and usefulness of RROI. Be sure to add fixed charge coverage ratios, accounts receivable days outstanding, and leverage ratios to your toolkit. What other benchmarks, yardsticks, and valuation tools and techniques should you use to make sound business and investment decisions?
Analyzing credit strength, deal structure, and RROI can help you make more informed and sound business and investment decisions. And when you step back, study history, and combine a wide array of analytical tools and techniques, you can protect your investments and your clients’ portfolios as the pendulum swings back and forth. What’s more, these tools and other techniques featured in our programs can help you spot and seize emerging market opportunities.
‘Deal Structure & Analysis’ is just one of the many CPE accredited courses presented by author Eric Gelb for Global Financial Markets Institute, Inc.
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Eric Gelb is a specialist in the originating and implementing securitization of new asset classes, as well as a professional trainer and developer of financial educational programs. His expertise covers a wide range of topics including Corporate Banking, Accounting, Structured and Corporate Finance, Leasing, Securitization, Financial Statement Analysis, Financial Management, Budgeting, Personal Financial Planning, Taxation, and Selling Corporate Banking & Corporate Finance Products to Fortune 1000 Companies.
With twenty years in the business, plus a Wharton and Columbia University pedigree, Eric has held significant positions with some of Wall Street’s largest firms, including Citigroup Bankers Leasing, and JP Morgan Seurities Structured Products Group. He specializes in originating and implementing securitization of new asset classes, including loans, royalty streams, future flows, leases, and contract monetization.
Eric’s accounting acumen was demonstrated with PWC’s General Audit Group where his clients consisted of Fortune 500 firms, auditing their financial statements. While associated with JPMorgan, Eric created a new Multi-Seller Conduit (Relationship Funding Company LLC), which funded structured transactions, generating over $1.9 billion of Commercial Paper outstanding.
An author of four books on personal finance, Eric has appeared on radio and television financial shows, including Bloomberg Radio, Bloomberg Television, NPR’s Sound Money, Business Radio Network, Bill Bresnan, and On the House with the Carey Brothers.
Eric specializes in the instruction of many programs, including: Structuring the Deal; Intro to Credit Risk; Financial Statement Analysis; Accounting; Practical Financial Management for Non Financial Managers; Fundamentals of Equity Valuation; and Budgets & Forecasting.
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| Interested in having Eric Gelb deliver a seminar for your group? |
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Making the Most Out of Your Instructor Led Training Archive…
So you’ve offered a great “ILT” class to your core group, along with wonderful handout materials to go with them. But you’re in need of rolling this out to others who simply cannot take a day or two away from the desk, or travel in from other branches to attend a live class. What can you do to reach those folks who need both the training, and in some cases, a “knowledge management tool” to refer back to as a periodic refresher course or reinforcement aid?
Need:
This was precisely the situation that one of GFMI’s clients was facing. We designed and delivered a formal classroom training course entitled “Asset Liability Management, Fixed Income and Derivatives,” for a government regulator. The client wanted to run the formal course once, but be able to use the material to train future examiners, as well as refresher training or reference for current examiners.
Solution:
We created a self-contained, standalone computer based training (CBT) course from this same instructional material to be used for independent study. The CBT blended new material with relevant select elements and spreadsheets from our Magellan online modules, in order to meet the client’s objectives.
Ongoing:
The final CBT product proved to be the right choice for use as a stand-alone independent study course for new field examiners, as well as a knowledge management tool for more seasoned examiners.
If time and portability are essential to educating your group, think about changing the venue of the ILT materials that you already possess. Much like ILT events, CBT programs can be customized to include your proprietary information indigenous to your specific needs and goals.
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