Posts Tagged ‘Bonds’

Volcker Rule and Covered Bonds

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday July 11, 2014 at 9:02 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Jerry Marlatt, Senior Of Counsel at Morrison & Foerster LLP, and is based on a Morrison & Foerster publication by Mr. Marlatt.

The subtler aspects of the Volcker Rule [1] continue to emerge. One of the subtleties is the extraterritorial reach of the Rule in connection with underwriting, investments in, and market making for covered bonds by foreign banks.

Foreign banks that underwrite, invest in, or conduct market making for covered bonds need to review their activity under the Volcker Rule.

…continue reading: Volcker Rule and Covered Bonds

The Effects of Mandatory Transparency in Financial Market Design

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday June 25, 2014 at 9:00 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Paul Asquith, Professor of Finance at Massachusetts Institute of Technology (MIT); Thomas Covert of the Economics Area at the University of Chicago; and Parag Pathak of the Department of Economics at Massachusetts Institute of Technology (MIT).

Many financial markets have recently become subject to new regulations requiring transparency. In our recent NBER working paper, The Effects of Mandatory Transparency in Financial Market Design: Evidence from the Corporate Bond Market, we study how mandatory transparency affects trading in the corporate bond market. In July 2002, the Trade Reporting and Compliance Engine (TRACE) program began requiring the public dissemination of post-trade price and volume information for corporate bonds. Dissemination took place in four phases over a three-and-a-half year period, with actively traded, investment grade bonds becoming transparent before thinly traded, high-yield bonds.

…continue reading: The Effects of Mandatory Transparency in Financial Market Design

Do the Securities Laws Matter?

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday May 5, 2014 at 9:30 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Elisabeth de Fontenay of Duke University School of Law.

Since the Great Depression, U.S. securities regulation has been centered on mandatory disclosure: the various rules requiring issuers of securities to make publicly available certain information that regulators deem material to investors. But do the mandatory disclosure rules actually work? The stakes raised by this question are enormous, yet there is precious little consensus in answering it. After more than eighty years of intensive federal securities regulation, empirical testing of its effectiveness has failed to yield a definitive result.

…continue reading: Do the Securities Laws Matter?

Who Knew that CLOs were Hedge Funds?

Editor’s Note: Margaret E. Tahyar is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. The following post is based on a Davis Polk client memorandum.

U.S. financial regulators found themselves on the receiving end of an outpouring of concern from law makers last Wednesday about the risks to the banking sector and debt markets from the treatment of collateralized loan obligations (“CLOs”) in the Volcker Rule final regulations. Regulators and others have come to realize that treating CLOs as if they were hedge funds is a problem and we now understand from Governor Tarullo’s testimony that the treatment of CLOs is at the top of the list for the new interagency Volcker task force. But what, if any, solutions regulators will offer—and whether they will be enough to allow the banking sector to continue to hold CLOs and reduce the risks facing debt markets—remains to be seen.

…continue reading: Who Knew that CLOs were Hedge Funds?

Acquisition Financing 2014: the Year Behind and the Year Ahead

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday February 4, 2014 at 9:12 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Eric M. Rosof, partner focusing on financing for corporate transactions at Wachtell, Lipton, Rosen & Katz, and is based on a Wachtell Lipton memorandum by Mr. Rosof, Joshua A. Feltman, and Gregory E. Pessin.

Following a robust 2012, the financing markets in 2013 continued their hot streak. Syndicated loan issuances topped $2.1 trillion, a new record in the United States. However, as in 2012, financing transactions in the early part of 2013 were devoted mostly to refinancings and debt maturity extensions rather than acquisitions. In fact, new money debt issuances were at record lows during the first half of 2013. The second half of 2013, though, saw an increase in M&A activity generally, and acquisition financing in the fourth quarter and early 2014 increased as a result.

…continue reading: Acquisition Financing 2014: the Year Behind and the Year Ahead

Corporate Funding: Who Finances Externally?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday June 5, 2013 at 9:29 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from B. Espen Eckbo, Professor of Finance at Dartmouth College, and Michael Kisser of the Department of Finance at the Norwegian School of Economics.

In our paper, Corporate Funding: Who Finances Externally?, which was recently made publicly available on SSRN, we provide new information on security issues and external financing ratios derived from annual cash flow statements of publicly traded industrial companies over the past quarter-century. Our use of cash flow statements permits us to differentiate between competing forms of internal financing, including operating profits, cash draw-downs, reductions in net working capital, and sale of physical assets. Unlike leverage ratios which dominate the focus of the extant capital structure literature, our cash-flow-based financing ratios are measured using market values (cash) and are unaffected by the firm’s underlying asset growth rate.

The empirical analysis centers around three main issues, the first of which is to establish the importance of external finance in the overall funding equation. In our pool of nearly 11,000 (Compustat) non-financial firms, the net contribution of external cash raised (security issues net of repurchases and dividends) was negative over the sample period. Moreover, the average (median) firm raised merely 12% of all sources of funds externally. Also, annual funds from total asset sales contributed more to the overall funding equation than net proceeds from issuing debt.

…continue reading: Corporate Funding: Who Finances Externally?

Exit Consents in Restructurings – Still a Viable Option?

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday May 22, 2013 at 9:26 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from David J. Billington, partner focusing on international financing transactions and restructuring transactions at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum; the full text, including footnotes and appendices, is available here.

Exit consents are often used as a restructuring tool by issuers of bonds. Issuers invite bondholders to exchange their existing bonds for new bonds (usually with a lower principal amount). In order to participate in the exchange, bondholders must agree to vote in favour of a resolution that amends the terms of the existing bonds so as to negatively affect (or, in Assénagon, [1] substantially destroy) their value. This is referred to as ‘covenant-stripping’. If the issuer does not achieve the majority needed to pass the resolution, the covenant-strip and the exchange do not happen. But if the resolution is passed, each participating holder’s bonds are exchanged for the new bonds, and the terms of the old bonds are amended to remove most of the protective covenants. This incentivises bondholders to participate in the exchange: accepting the new bonds (even though they will usually have a lower face amount than the existing bonds) may be preferable to being ‘left behind’ in the old bonds, which will cease to have any meaningful covenant protection.

Facts of the case

Anglo Irish Bank Corporation Limited (the “Bank”) suffered severe financial difficulties as a result of the financial crisis, and was nationalised in January 2009. As part of its restructuring, the Bank proposed an exchange offer whereby:

…continue reading: Exit Consents in Restructurings – Still a Viable Option?

Sovereign Debt, Government Myopia, and the Financial Sector

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday May 16, 2013 at 9:21 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Viral Acharya, Professor of Finance at New York University, and Raghuram Rajan, Professor of Finance at the University of Chicago.

Why do governments repay external sovereign borrowing? This is a question that has been central to discussions of sovereign debt capacity, yet the answer is still being debated. Models where countries service their external debt for fear of being excluded from capital markets for a sustained period (or some other form of harsh punishment such as trade sanctions or invasion) seem very persuasive, yet are at odds with the fact that defaulters seem to be able to return to borrowing in international capital markets after a short while. With sovereign debt around the world at extremely high levels, understanding why sovereigns repay foreign creditors, and what their debt capacity might be, is an important concern for policy makers and investors. In our paper, Sovereign Debt, Government Myopia, and the Financial Sector, forthcoming in the Review of Financial Studies, we attempt to address these issues.

…continue reading: Sovereign Debt, Government Myopia, and the Financial Sector

The Supply and Demand for Safe Assets

Posted by Gary Gorton, Yale School of Management, on Friday March 22, 2013 at 9:15 am
  • Print
  • email
  • Twitter
Editor’s Note: Gary Gorton is a Professor of Finance at Yale School of Management.

In the recent NBER working paper, my co-author, Guillermo Ordoñez of the University of Pennsylvania, and I develop a model to examine the important role collateral plays in the economy. Where do safe assets come from? Empirical evidence suggests that the private sector creates more near riskless assets when the supply of government debt is low and reduces privately-created near riskless assets when the supply of government debt is high. Krishnamurthy and Vissing-Jorgensen (2012) show that the net supply of government debt is strongly negatively correlated with the net supply of private near-riskless debt.

The substitution between public and private safe debt is also shown by Krishnamurthy and Vissing-Jorgensen (2012) who document that changes in the supply of outstanding U.S. Treasuries have large effects on the yields of privately created assets. Gorton, Lewellen, and Metrick (2010) also find this relationship between government debt and privately produced substitutes. They document that the share of safe assets in the U.S. economy, including both U.S. Treasury debt and privately created near-riskless debt has remained constant as a percentage of all U.S. assets since 1952. Xie (2012) shows that the issuance of asset-backed securities tends to occur when the outstanding government debt is low and Sunderam (2012) documents the same phenomenon with respect to asset-backed commercial paper.

By “safe assets,” we mean government debt and privately created high quality debt, in particular, asset-backed securities. Such safe assets are used to collateralize repo, derivative positions, and are needed as collateral in clearing and settlement. See IMF (2012). Further, because they are ”information-insensitive” (in the nomenclature of Dang, Gorton, and Holmstrom (2012)), they are highly liquid and hence can store value without fear of capital losses in times of stress, a form of private money.

…continue reading: The Supply and Demand for Safe Assets

Corporate Finance Perspective on Large-Scale Asset Purchases

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday December 28, 2012 at 8:06 am
  • Print
  • email
  • Twitter
Editor’s Note: This post is based on the recent remarks of Jeremy C. Stein, a member of the Board of Governors of the Federal Reserve System, at the Third Boston University/Boston Fed Conference on Macro-Finance Linkages, which are available here.

Given that the conference theme is macro-finance linkages, I thought I would try to lay out a corporate finance perspective on large-scale asset purchases (LSAPs). I have found this perspective helpful in thinking both about the general efficacy of LSAPs going forward, and about the differential effects of buying Treasury securities as opposed to mortgage-backed securities (MBS). But before I get started, please note the usual disclaimer: The thoughts that follow are my own and do not necessarily reflect the views of other members of the Federal Open Market Committee (FOMC). I should also mention that these comments echo some that I made in a speech at Brookings last month. [1] As I noted in that speech, I support the Committee’s decision to purchase mortgage-backed securities (MBS) at a rate of $40 billion per month, in tandem with the ongoing maturity extension program in Treasury securities, and its plan to continue with asset purchases if the Committee does not observe a substantial improvement in the outlook for the labor market.

…continue reading: Corporate Finance Perspective on Large-Scale Asset Purchases

Next Page »
 
  •  » A "Web Winner" by The Philadelphia Inquirer
  •  » A "Top Blog" by LexisNexis
  •  » A "10 out of 10" by the American Association of Law Librarians Blog
  •  » A source for "insight into the latest developments" by Directorship Magazine