VIRTUAL FINANCES BLOG

Control is exercised by monitoring the company’s performance against agreed targets. Control over the transaction enables momentum to be maintained to complete it both during the restructuring discussions and subsequently within a given time frame. It also gives the participating banks the ability to react to events quickly, and thereby address problems before they are too late. Control plays an important part within the bank as well, so that the transaction team works efficiently and effectively.

Communication

Communication should be present at all levels: within the workout team in a bank so that all members of the team know the exact position and status of the restructuring; within the loan workout unit of a bank so that a consistent approach is adopted by the institution in all its workouts; within the bank to enable knowledge transfer from the workout department to, in particular, the bank’s credit function; with other creditors and the company during the restructuring so that all parties are kept informed of each other’s positions, where appropriate; and communication should be maintained with the company after the restructuring is in place to ensure effective monitoring and control.

A restructuring solution that is based on erroneous or unreliable information is unlikely to succeed. Every attempt should be made to establish the exact financial position of the company, as well as the credibility of any financial projections. Often this is very difficult and takes considerable time, partly because the lack of reliable information usually contributes to the company’s problems in the first place. Banks must invest all the time that is necessary to obtain reliable information at the outset of the restructuring. It is usually necessary to verify any information produced by the company independently to achieve this. Also, the sharing of information amongst stakeholders promotes trust in the loan workout process.

Anticipation and planning

An experienced banker can anticipate problems and take corrective action before it becomes necessary. To be able to do so, the banker must have sufficient dedicated time and resources to consider all possible options and approach loan workouts in a methodical way. The planning process should also incorporate contingency plans to be implemented in the event of unexpected outcomes. Planning also enables a bank’s resources to be deployed efficiently.

Trademarks and trade names are a second class of identifiable intellectual property. Trademark law is intended to prevent consumer confusion as to the source of products or services. The great names of the old economy are largely trademarked: Coca-Cola, McDonald’s, Xerox, Sears, Gillette, DuPont, and Kodak all inspire trust on a global basis. They create shareholder value above the intrinsic value of the goods and services in the marketplace.

The proliferation of web sites has made trade names even more important in the New Economy. Witness the flood of dotcom advertising during the Christmas season of 1999 aimed at creating brand awareness. The very names America Online and AOL, Amazon, Yahoo!, and eBay are now important commercial franchises. The traffic that comes with consumer awareness generates real options to supply new services on these sites and thus leverages value beyond that earned from the existing services.

Trademarks can be used commercially almost as aggressively as patents. Monsanto spent millions to establish the Nutrasweet trademark and required soft drink suppliers such as Coca-Cola and PepsiCo to put the Nutrasweet swirl logo on every can and bottle. They succeeded, despite considerable resentment from their customers, because of their patent position on the composition of matter. The objective was to use the trademark to differentiate Nutrasweet from generic aspartame and to protect its market position after the patent expired. The strategy appeared to work for a while, but the swirl now has been harder to find on the cans of the major soft drink brands.

The case for continuous innovation is powerful. The key idea is that a company in time calibrates the slope of its technological Scurve in financial terms.3 It gains that knowledge through an analysis of the costs of its R&D programs, counting both successes and failures. At the same time, it learns the impact of improved performance on sales growth and margins. The combination tells it how fast it can move up the S-curve for a given level of technology spending.

Faster growth and higher margins translate directly into value. A higher, sustainable growth of free cash flow significantly boosts discounted cash flow (DCF) valuations. And higher margins improve return on invested capital. The combination of high returns and high growth rates can produce sensational gains in economic value.

Of course, an R&D investment reduces free cash flow in the short term, as in the Boeing case, so it is necessary to factor in R&D productivity to determine whether the long-term growth creates more value than the short-term penalty extracts. Several metrics have been proposed for measuring R&D productivity. In The Valuation of Technology, I proposed using a growth-related measure: the ratio of annual new product sales to the portion of the R&D budget dedicated to innovative new products.

Other companies have developed algorithms for calculating return on investment (ROI) on R&D investment. In the long term, however, R&D productivity cannot be expected to remain constant. As one mines out the more attractive opportunities at the foot of the S-curve and as its slope flattens, it makes sense to reduce R&D and to eliminate programs that no longer add value.

It would seem that an effective tax policy is part of the foundation on which prosperity must rest. A wise state invests in security, infrastructure, education, public health, and even basic research when they are value-adding propositions. Taxes are needed to finance these investments. But it is not only the amount of taxes extracted from the economy but how they are extracted that counts, for the tax code will play an enormous role in investment decisions, and not all tax codes favor value creation.

The state also has the potential to destroy economic value through unwise expenditures. Indeed, because economics is only one criterion in developing public policy, a state will always do some of both. Let us consider some of the issues.

Broadly speaking, governments derive taxes from consumption, income, and wealth. These taxes can be leveled on individuals or on organizations. Generally, all of these sources are taxed in some way.

One of the most fundamental tax issues is whether to rely first on consumption taxes or on income and wealth taxes. The choice is of great importance to investors, who would be motivated to invest more if taxes were lighter at the income or wealth level and primarily levied at the point of consumption. Increased funds available for investment would also reduce the cost of capital and thus the ability of projects to create value.

Typical consumption taxes include sales taxes and the valueadded tax (VAT) prevalent in Europe. Consumption taxes are, however, inherently regressive, falling relatively heavily on the poor. Hence, U.S. society in effect creates incentives to consume and relative disincentives to invest by favoring personal income taxes as its primary source of tax collection.

Soft delinquency triggers dynamically link credit enhancement to deal performance. There are two types of soft delinquency triggers. The first is asoft trigger based on the credit enhancement of the senior certificates. This trigger specifies a target value for delinquencies as a percentage of the senior certificate’s enhancement. This type of trigger mostly protects the senior bondholders. However, as the senior classes pay down, the credit enhancement to those classes increases and the trigger becomes mechanically weaker, to the point that it may no longer be effective.  Under the higher prepayment scenarios, the delinquency threshold increases faster than under slower prepayment scenarios.

The second type of soft delinquency trigger is based on the credit enhancement of the most senior outstanding bond. This kind of delinquency trigger will not step down if serious delinquencies exceed a target level that is tied to the credit enhancement available for the most senior outstanding class. The structure of this trigger partly addresses the weakness of the delinquency trigger discussed previously.

Lower credit grade borrowers exhibit higher risk multipliers relative to the baseline (risk grade AA). This is due to the “credit curing effect.” Credit curing refers to the improvement in a borrower’s credit score or profile as the borrower makes and maintains a schedule of timely payments. As the borrower’s credit improves, he or she could become eligible for a prime or near-prime loan with a favorable rate relative to a subprime loan. As a result, the borrower is “in-the-money” and faces a positive economic incentive to refinance.

The credit curing effect increases as the borrower’s risk grade declines. This is because the lowest risk grade borrowers (C, CC) are paying the highest rates and, as a result, realize the greatest economic benefit from credit curing.

CDOs gained a bad reputation of being extremely illiquid when the product was first introduced. Therefore, it should come as no surprise that new investors question the depth of the secondary markets. When the credit markets hit bottom in 2002, secondary trading in CDOs began to proliferate.

Most dealers now have secondary trading desks and make markets in each others’ transactions. As a result, bid-ask spreads have narrowed substantially since early 2000.

Clearly, the narrowest bid-ask spreads are found at the top of the capital structure. In 2006, however, even equity bid-ask spreads (particularly for CLO equity) narrowed. As with all financial products, liquidity evaporates during periods of high volatility.

We believe equity investors should assume they are buying to hold, and any liquidity they receive should be viewed as a bonus. As for note investors, the key to avoiding a liquidity crunch is to stick to straightforward, easyto-model CDOs. Third-party software has been instrumental in helping secondary trading desks make a market in each others’ deals. If the structure is too esoteric, however, it may not make it into the vender’s database. In that case, an investor would most likely only have the underwriter to turn to when it comes time to sell.

The growth of the credit default CDO (CDCDO) market should, in the long run, continue the trend toward a more liquid secondary market. It could also lead to a few traffic bumps in the short term. A CDS contract requires one party to go long the risk, while another is effectively short. This fact alone opens the door to speculators who help provide liquidity, but who also increase market volatility. Higher market volatility leads to wider bid-ask spreads.

Online banking has clear advantages: they are independent of opening times and can be all sorts of transactions quickly and conveniently in order. But the popularity of online banking also attracts criminals to: Often, consumers receive e-mails with an invitation to a site via clickable link their bank access their personal information. The no circumstances should you do, because the basis of these data can be the unauthorized online account easily plunder.

Respect for online banking Trojans

Also very dangerous are so genannnte Trojans, in secretly creep into your PC. You catch your access data unnoticed and guided them further. So never open e-mails unknown senders and protect your computer necessarily with a current antivirus software.

ITAN, Etan and procedures HBCI

So that the abuse risk is low, some banks have your transaction methods converted. In the so-called iTAN procedures must, for example, after you input your PIN is not any TAN number from the list, but each of the Bank provided certain number. Even safer (but not yet so often applied) are ETAN HBCI or procedures. In both
procedures, the account holder is an electronic device made available, which his identity when online banking tamper-proof confirmed.

So you should act in case of damage

As a precautionary measure against abuse in online banking you must access your data safe place. Keep your PIN and TAN data separately and not save it on your hard drive. You should also difficult to guess passwords choose not to transfer the case from publicly accessible computers active and regularly check your bank statements. If you find irregularities, put your best coincide with your bank in connection and block online access through three entry of a wrong PIN. Then you can ask the police to report. So you have the best prospects, the damage from your bank to get reimbursed.

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