Rollscritique Blog

U.S. Appetite For 'CoCo' Bonds Could Be Tested Soon--Bankers

2011-02-26T13:37:00.000-08:00

http://online.wsj.com/article/BT-CO-20110215-712432.html

"Many are pinning their hopes on a type of security called a contingent-convertible bond, or a 'CoCo', which converts from debt to equity when certain bank metrics, such as capital reserves or share price, fall below certain levels. The reduction in debt and increase in equity delivers a shot in the arm to the financial institutions' balance sheets."
"While buyers are paid well for investing in CoCos--one batch of CoCos averaging 10 years to maturity currently yields around 10%, a full percentage point over comparable junk debt--the jury is out on how investors may respond when CoCos come to market."
CoCos resemble hybrid securities because they convert from a bond-like instrument to an equity-like instrument, essentially recapitalizing the firm and staving off the sort of government bailout seen in the last crisis. Yet they differ from traditional hybrids because the conversion is mandatory, not at the option of the issuer.
The trigger depends on the borrower's creditworthiness, as determined by a measure of financial cushioning called core Tier-1 capital--the strongest capital on a firm's balance sheet. Once CoCos convert into equity, investors would start to lose their principal and could be wiped out entirely before holders of subordinated and senior unsecured debt absorb any losses.
A key consideration for investors is where that conversion trigger is set. The lower it is, the more attractive a CoCo is to a buyer because the issuer is more likely to be on its last legs when conversion occurs.

Really Long Term Bonds

2010-11-15T20:20:00.000-08:00

Low interest rates have made "long-term bonds" attractive. Coca-Cola and Disney have previously issued 100 year bonds. But, that is nothing:

From A Study of Corporation Security by Arthur Stone Dewing:

The extreme longevity of a bond was presumed to have been reached when the west Shore Railroad placed on its lines a mortgage due in the year 2361. This is exceeded, however, by the farcical date of maturity of the Elmira and Williamsport 5% Income Bond of [the year] 2862

This Investopedia Article explains the merits of long-term bonds

Sam Rosenfeld: Life Settlement an Emerging Asset Class

2010-11-07T13:02:00.000-08:00

Sam Rosenfeld, Managing Director of Longevity Mortality Strategies, has written a Wharton white paper on life settlements:

"Life settlements do not arise from radical new concepts. Grounded in the same financial
modeling as life insurance and annuities, their value is in creating a secondary market for
life insurance policies where there was none."
"The fundamental offering provided by life settlements is that they provide greater cash settlements for policies than the life insurers themselves, when the policyholder needs as much value as possible from their asset."
These instruments are creating the need for better longevity models (better models for predicting longevity / mortality); this has value for individuals, their financial planners, etc.
Synthetics and indices are emerging
"It is a safe prediction that by the end of 2012, the key elements of portfolio diversification for sophisticated investors will be equities, bonds, commodities, real estate and longevity."

For a list of other life settlement funds, check out: http://www.rollscritique.com/insurance-linked-securities

What are the Drivers of Security Design

2010-11-07T12:50:00.000-08:00

William Silber studied 38 financial products/processes introduced between 1970 and 1982 and concluded that the primary drivers of financial innovation are: inflation (especially high interest rates due to inflation), volatility of interest rates, technology, legislation, and internationalism.

Merton Miller (best-known as the Nobel-Prize winning co-author of the Modigliani-Miller Theorem concluded that the primary drivers were regulation and taxation; tax and regulation are "the major impulses to successful innovation."¹ Miller described financial innovations as "seeds beneath the snow, waiting for some change in the environment to bring them about."²

There are a basic set of features of a financial product - "ingredients" which can be mixed and matched "bundled and unbundled" to create new products:

"At its basic level, the financial instrument is a contract written on paper and potentially all possible financial contracts can be written without any technological barrier (Desai and Low, 1987, p. 115). In this sense, financial innovations are not new goods. They are implicitly always there, but in zero supply (Greenbaum and Heywood, 1973). …. Dufey and Giddy (1981) argue that financial innovation largely consists in the development of new ways of bundling the basic services. While the bundling and unbundling exhibits an infinite variety, the basic products themselves have remained largely unchanged. As Niehans (1983, p. 538) puts it, 'Except for electronic technology, if an experienced banker from medieval Venice or Geneva came to life again, he could understand the operations of a modern bank in a matter of days.³"

Other factors include issuers desire to reduce information and agency costs when raising capital.

More info available here:

Security Design Reading List, Part I

2010-10-20T21:09:00.000-07:00

"Evolution of Security Design" http://papers.ssrn.com/sol3/papers.cfm?abstract_id=511044
"Security Design in Initial Public Offerings "http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1008411
A study of corporation securities : their nature and uses in finance / by Arthur Stone Dewing; Dewing, Arthur

Other Implications of Baby Boomer Aging: Toys

2010-07-26T21:01:00.001-07:00

A lot of people have draw the conclusion:

Baby Boomers are aging -->
There will be more old people -->
Time to invest in healthcare, health services, and other services to satisfy he elderly

Another way to think about this is

Baby Boomers had few children (Echo Boomers) -->
Echo Boomers are having fewer children -->
Investment in companies targeted towards children is less attractive (potentially shortable)

The companies that come to mind (Toys R Us, Nickelodeon, etc.) are either non-public or part of a larger company

Also, I would not necessarily advocate shorting Toys R Us - b/c it could very well grow despite industry headwinds (e.g., by picking up market share, via M&A, etc.). What may be interesting is shorting a hypothetical index of children-related companies.

Groupon CEO Interview

2010-07-05T17:35:00.000-07:00

The Story Of Groupon: From Failure To An Industry-Changing, Profit Machine – with Andrew Mason

Interview w/ Groupon CEO

Deutsche Bank's "ABCs of CDOs"

2010-07-03T12:01:00.000-07:00

The Credit Guide To CDO

Bond Analytics: Taking an Open Souce Approach

2010-06-28T20:28:00.002-07:00

"If an open source approach has worked so well in software, why not apply it to the ratings problem? Whether or not ratings should be required for institutional investors to buy certain securities is not the issue; the essential point is getting better transparency into and analysis of instruments constituting the investable universe."

Also see FreeRisk

Investment Idea: Baby Boomer Flight to Dividends

2010-06-28T20:28:00.001-07:00

As Baby Boomers retire, they will sell shares in speculative stocks and buy more conservative, higher dividend stocks (think DuPont, Pfizer, Kraft, etc.).

Binary Option Sites: May 18 2010

2010-06-28T20:27:00.001-07:00

Some interesting articles on binary options

"Asia, and Singapore in particular, could definitely benefit from the stupid regulatory environment in Europe," said Lionel Martellini, director of France's EDHEC Risk and Asset Management Research Center.

http://www.reuters.com/article/idUSTRE64G31W20100517

Binary Options

Binary Option Sites: May 18 2010

http://www.wallstreetoasis.com/forums/binary-options

No Love for Asian Distressed Debt

2010-06-28T20:26:00.002-07:00

"Asian distressed is struggling to attract as much money as its brethren in other parts of the world.

"The US is at the forefront of allocating to distressed strategies," says Marlin Naidoo, award-winning prime broker and head of hedge fund capital group for Asia-Pacific at Deutsche Bank. "But their money is mainly going to US distressed managers. Over here, Asian investors have spent less time looking at Asian distressed managers."

In Asia, investors want liquid strategies. Japanese investors in particular are credited with being fixated on the short-term time horizon.

"We had a pot of capital destined for distressed strategies from European investors," says Doug Coulter, Asia-Pacific head of private equity for LGT Capital Partners. "However, that got deployed in Europe and America. Our investors are more interested in the growth story of emerging Asia instead of the distressed themes here.""

http://www.financeasia.com/News/174181,international-investors-dont-favour-the-asian-distressed-look.aspx

Film Futures, Part I

2010-06-28T20:26:00.001-07:00

Film Futures: April 26 2010

The US Commodity Futures Trading Commission (CFTC) has approved two exchange proposals for the trading of futures contracts based on film box office revenues. However, the CFTC stopped short of allowing the exchanges to begin trading in light of objections from the film industry and moves in Congress to prohibit the business.

In April, the CFTC approved applications from Cantor Futures Exchange and Media Derivatives (MDex) for designation as contract markets, allowing them to establish exchanges for the trading of futures contracts. Before trading can begin, however, the CFTC will need to approve the contracts the exchanges wish to offer and that approval will not necessarily be given following pressure from the film industry and its supporters in the US Congress

Full article: http://www.risk.net/risk-magazine/news/1602831/cftc-approves-film-futures-despite-hollywood-protests

Case Schiller ETF Mechanics

2010-06-28T20:24:00.000-07:00

Interesting article on how to create a security that is related to, but not dependent on ownership of a physical asset - in this case, the construction of a Case Schiller ETF

http://online.wsj.com/article/SB123897667301591301.html?mod=dist_smartbrief#articleTabs%3Darticle

Peak Phosphorous

2010-06-28T20:23:00.000-07:00

Interesting article on "peak phosphorous": http://www.foreignpolicy.com/articles/2010/04/20/peak_phosphorus?page=0,1

Possible Implications:
- Invest behind Phosphorous miners
- Phosphorous shortage could hurt fertilizer margins OR fertilizer pass on higher costs to farmers

Fertilizer Companies

Mosaic: http://www.wikinvest.com/wiki/Mosaic
Potash: http://www.wikinvest.com/wiki/Potash_Corporation_of_Saskatchewan_%28POT%29
Agrium: http://www.wikinvest.com/wiki/Agrium_%28AGU%29

Welcome to Rollscritique.com

2010-06-28T20:21:00.000-07:00

Welcome to the companion blog of http://www.rollscritique.com/