Posts Tagged ‘Debt’

An Economist’s View of Market Evidence in Valuation and Bankruptcy Litigation

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday June 28, 2014 at 9:00 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Faten Sabry, Senior Vice President at NERA Economic Consulting, and is based on a NERA publication by Ms. Sabry and William P. Hrycay.

Courts often face many challenges when assessing the solvency of a company whether public or privately held. Examples of difficult valuation questions include: would a company with a market capitalization of several hundred million dollars possibly be insolvent? Or, would publicly-traded debt at or near par be conclusive evidence that the issuer is solvent at the time? Or, would a company’s inability to raise funds or maintain its investment grade rating at a given time be sufficient to rule on solvency?

It is common in valuation and solvency disputes to have qualified experts with very different opinions on the fair market value of a company, often using the same standard approaches of discounted cash flows and comparables. How would the courts or the arbitrators decide and what is the role of contemporaneous market evidence in such disputes? In this article, we discuss the role of market evidence and possible misinterpretations of such evidence and highlight recent court decisions in the United States.

…continue reading: An Economist’s View of Market Evidence in Valuation and Bankruptcy Litigation

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

A Theory of Debt Maturity

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday January 14, 2014 at 9:23 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Douglas Diamond, Professor of Finance at the
 University of Chicago Booth School of Business, and Zhiguo He of the
 Department of Finance at the University of Chicago Booth School of Business.

In our paper, A Theory of Debt Maturity: The Long and Short of Debt Overhang, forthcoming in the Journal of Finance, we study the effects of the debt maturity on current and future real investment decisions of an owner of equity (or a manager who is compensated by equity). Our analysis is based on debt overhang first analyzed by Myers (1977), who points out that outstanding debt may distort the firm’s investment incentives downward. A reduced incentive to undertake profitable investments when decision makers seek to maximize equity value is referred to as a problem of “debt overhang,” because part of the return from a current new investment goes to make existing debt more valuable.

Myers (1977) suggests a possible solution of short-term debt to the debt overhang problem. In part, this extends the idea that if all debt matures before the investment opportunity, then the firm without debt in place can make the investment decision as if an all-equity firm. Hence, following this logic, debt that matures soon—although after relevant investment decisions, as opposed to before—should have reduced overhang.

…continue reading: A Theory of Debt Maturity

The Capital Structure Decisions of New Firms

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday July 23, 2013 at 9:16 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Alicia Robb, Senior Fellow with the Ewing Marion Kauffman Foundation, and David Robinson, Professor of Finance at Duke University.

Understanding how capital markets affect the growth and survival of newly created firms is perhaps the central question of entrepreneurial finance. Yet, much of what we know about entrepreneurial finance comes from firms that are already established, have already received venture capital funding, or are on the verge of going public—the dearth of data on very-early-stage firms makes it difficult for researchers to look further back in firms’ life histories. Even data sets that are oriented toward small businesses do not allow us to measure systematically the decisions that firms make at their founding. This article uses a novel data set, the Kauffman Firm Survey (KFS), to study the behavior and decision-making of newly founded firms. As such, it provides a first-time glimpse into the capital structure decisions of nascent firms.

In our paper, The Capital Structure Decisions of New Firms, forthcoming in the Review of Financial Studies, we use the confidential, restricted-access version of the KFS, which tracks nearly 5,000 firms from their birth in 2004 through their early years of operation. Because the survey identifies firms at their founding and follows the cohort over time, recording growth, death, and any later funding events, it provides a rich picture of firms’ early fund-raising decisions.

…continue reading: The Capital Structure Decisions of New Firms

Final Bank Capital Rules and Basel III Implementation

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday July 16, 2013 at 9:57 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Sullivan & Cromwell LLP, and is based on a memorandum by H. Rodgin Cohen, Mark J. Welshimer, Samuel R. Woodall III, Joel Alfonso, Simon Rasin, and Lauren A. Wansor.

On July 2, 2013, the Board of Governors of the Federal Reserve System (the “FRB”) unanimously approved final rules (the “Final Rules”) establishing a new comprehensive capital framework for U.S. banking organizations [1] that would implement the Basel III capital framework [2] as well as certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The Final Rules largely adhere to the rules as initially proposed in June 2012 (the “Proposed Rules”), [3] notwithstanding that the industry objected, sometimes strenuously, to certain aspects of the Proposed Rules. Most of the changes made in response to the industry’s most fundamental concerns were effectively limited to community banks and other smaller banking organizations; the most stringent rules for “advanced approaches banking organizations”—those with $250 billion or more in total consolidated assets or $10 billion or more in foreign exposures—were maintained. For example:

…continue reading: Final Bank Capital Rules and Basel III Implementation

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?

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

Private Equity Firms as Gatekeepers

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday April 28, 2013 at 10:17 am
  • Print
  • email
  • Twitter
Editor’s Note: The following post comes to us from Elisabeth de Fontenay, a Climenko Fellow at Harvard Law School.

My article, Private Equity Firms as Gatekeepers, identifies an important and overlooked way in which private equity creates value: private equity firms act as gatekeepers in the debt markets. As repeat players, private equity firms establish reputations with lenders that are tied to the credit performance of the companies that they acquire and manage. In turn, private equity firms use their reputations both to certify the creditworthiness of their companies ex ante and to bond against misconduct or poor performance by their companies ex post. Private equity firms thereby mitigate the problems of borrower adverse selection and moral hazard that plague the debt markets. These certification and bonding functions of private equity are best understood as gatekeeping: by causing companies to behave better toward creditors than they otherwise would, private equity firms afford companies access to more capital, and on better terms, than they could otherwise get. The article provides both conceptual and formal proofs of this gatekeeping hypothesis.

The most obvious benefit from private equity’s gatekeeping role is that, all else being equal, it should allow private equity-owned companies to borrow money on better terms than other companies. And crucially, this role will become increasingly valuable in light of sweeping changes in the corporate loan markets. Lenders’ traditional methods of controlling borrower adverse selection and moral hazard – screening, monitoring, and covenants – are in sharp decline. This decline is due to the major shift from relationship banking, in which a company borrows from a single bank that holds the loan until maturity, to syndicated lending. Syndicated loans are funded by large numbers of unrelated creditors and may be traded or securitized to reach still more creditors. As the chain from the borrowing companies to their ultimate creditors lengthens, the information gap between them increases significantly, while creditors’ incentives to monitor their borrowers decline. If private equity firms can credibly fill the void in monitoring left by lenders, their companies will get significantly better financing than other companies.

…continue reading: Private Equity Firms as Gatekeepers

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