Manage Money and Income Sucessfully

Peter had met with the labor council and brought a proposal back to John. “John, the labor costs on this project are very close. We’ll subsidize the labor cost one cent per labor hour. But if we do this, we want you to sign a project agreement with us. As you know, in a project agreement we’ll ensure that you have the needed labor and we’ll provide you with a no-strike clause. And in return you’ll agree to make this an all-union work site.Additionally,we’ll help reduce the labor cost to make the job cost-competitive with nonunion contractors. Your client needs to have this job completed on time. Going with a nonunion contractor opens you up to risk in this area. Our record proves that if you sign a project agreement with us, you won’t be held up by labor problems.Will you commit to a project agreement?” John thought about it for a few minutes.While the labor would cost slightly more than he wanted, he knew Peter was right about getting the job completed on time. The trades had the resources needed to complete the job. Some nonunion contractors were excellent, but getting enough people on site was always an issue. John asked Peter: “What would I need to do if I were to commit to using all-union labor on this project?” Peter suggested they review a project partnering agreement that the Building and Construction Council had used on other projects. Then, they could decide what to include in or exclude from their agreement. John liked the idea, so they proceeded. The project partnering agreement that Peter showed him was five pages long and included thirteen articles. Each article addressed a term of the agreement. John took a minute to review each article.

Almost all bonds of companies being upgraded into investment grade show a significant spread tightening long before the actual rating action.  Of course at the time of the upgrade technical factors (new previously restricted buyers emerge) tighten the spreads further.

This is an effort to categorize the evaluation of Fallen Angels. Only the most important points are mentioned. In a first step, the analyst has to decide whether the company falls into the category stressed or distressed. The following points should help in the decision-making process. A distressed credit is very likely to default, and break-up value has to be determined. A stressed credit has a realistic chance for a turnaround and one has to estimate how likely this case is.

Companies that have a successful turnaround will show most of the following characteristics:

• Successful deleveraging and improvement of the liquidity situation is realistic.
• Asset Sales can be done in an adequate time and at acceptable levels.
• Debt maturity profile is improved by refinancing (new bank lines and bond issues).
• Additional rights issue is feasible.
• Capital structure option is exercised in favor of bondholders and the equity market rewards these steps as well.
• Corporate actions (reduction of CAPEX, postponement or cancellation of acquisitions, cost cutting, solid management of working capital).
• Change of management.

Adowngrade into high yield may have the following effects:

• Forced selling activities from investment grade accounts
• Direct effect on the financial flexibility of a company (CP program, bank covenants triggered), may result in “financial distress” in a worst-case scenario

The spread behavior prior and after a downgrade into high yield or an upgrade into investment grade is of particular interest. The average spread for 15 companies’ 200 trading days before and after a downgrade into high yield. Day “0” is set as the day where the first downgrade from investment grade into high yield occurred either by Moody’s or S&P. The bonds we chose for this analysis were downgraded between 2002 and 2003 and are presented below.

It is noteworthy that a significant deterioration in spreads occurs long before the actual rating action takes place. At the day “0” obviously in most cases further spread widening/price fall takes place but this can be explained by technical factors. Forced sellers will emerge and in an illiquid market bid-offer spreads can be as wide as 3–4 price points and prices can deteriorate quickly if no buyers arise.