02Jan

Spread that solely mirrors credit risk

FILED IN crisis | debt | debt consolidation | loans guide | payday loans Comments Off

111Based on historical data on defaults we can derive the fraction of the spread over riskless bonds for different rating classes and maturities, that is solely due to the probability of default and loss given default. The expected loss rate is derived from these two factors. Market participants who have a buy-and-hold perspective must decide on whether the current spread of a corporate bond sufficiently compensates for default and migration risk.

This is rather the perspective of a private than an institutional investor, because the latter in general has a short- to medium-term investment horizon and rarely holds a bond to maturity. In general, the institutional investor tries to achieve an excess return against a benchmark with a trading oriented management approach.

However, for the calculation of the required spread from a buy-and-hold perspective reliable default probabilities and recovery rates have to be used. If the issuer has an agency rating, Moody’s historical database is a good starting point. This database compiles expected default probabilities on a historical basis which is updated annually and also average recovery rates depending on the seniority of a bond. Those values allow to calculate a “fair” spread that solely mirrors credit risk.

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10Oct

Attention focused on sealing the credit deal

FILED IN credit | loans | loans guide | payday loans | profit | real estate Comments Off

Short-term issues. Attention focused on sealing the deal, not on the longer-term, all-important issue of how to make it work.

Leadership issues. The leadership at all levels of DaimlerChrysler clashed as the new company drew its leaders from two radically different firms: Daimler-Benz and Chrysler (see point 1 above).

Corporate identity and communications issues. There are dangers in replacing familiar brand names with those of a new brand. The magic of the old may be destroyed, or at least diminished, by the logic of the new. The degree of emotional attachment felt by stakeholders to a company’s name should not be underestimated. In the case of DaimlerChrysler, Daimler-Benz’s stakeholders were offended by their company’s renaming as they believed the process was really an acquisition, and Chrysler stakeholders were similarly offended by the renaming of their company.

Once a deal is agreed in principle, the chances of it succeeding will be greatly enhanced if the messages sent out from both organisations are consistent. This rarely happens in a thoroughly convincing way, but when it does it makes a big
difference.

Potentially conflicting objectives. It is hard for employees to focus on the corporate objectives of a merger if they are worried about their own position. All mergers involve reorganisation and job cuts, so to keep employees as “on side” as possible there must be regular and honest communication.

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