Saturday, November 9, 2019
S&P, one of the major bonds rating agencies, has categorized bonds by credit ratings, and BBB bonds compose the largest chunk of corporate bonds. BBB bonds account for $3.2 trillion, or 53 percent of the outstanding investment grade bonds. Total BBB corporate debt, including term loans and revolving credit facilities, tops $7 trillion. One risk with this much debt just above the junk level is that an economic downturn could result in a large part of this debt being downgraded to junk status.
Tuesday, October 22, 2019
Corning recently won the Gold Award in liquidity management from Treasury & Risk. In 2015, the company announced its Capital Allocation Framework, designed to reduce its $5.5 billion in cash by one-half. The company generates one-third of its revenue in Asia, which is where much of the cash was tied up. Thanks to the formation of the Shanghai Free Trade Zone, Corning was able to pool its cash, allowing for more flexibility in cash management. Better cash management practices have allowed Corning to reduce its cash balance to about $1.2 billion as of June 2019.
Wednesday, September 25, 2019
Last week, we mentioned that WeWork had pulled its IPO, and now, CEO Adam Neumann appears to be paying the price. WeWork's biggest investor, SoftBank, called for his ouster this past weekend, and today, Neumann announced he would be stepping down as CEO. Even though Neumann co-founded WeWork in 2010, investors apparently lost faith in him to lead the company going forward.
Tuesday, September 17, 2019
As we discussed in the textbook, an unsystematic risk affects a small number of companies, often only one company. Investors in cannabis producer CannTrust learned about systematic risk today as the stock fell 14 percent when the company's license to grow marijuana was suspended. The stock has fallen since July, when it was discovered the company was growing plants in an unlicensed room, resulting in the destruction of thousands of pounds of plants. Investors received a bigger shock in in July when the unlicensed plants were discovered: The stock fell about 22 percent that day. The company's CEO has been fired, but whether the license will be reinstated is unknown.
Shared workspace company WeWork has apparently delayed its IPO. The company was expected to go public at the end of the month, but low investor demand apparently halted this plan. It was reported last week that the company might value its stock between $10 and $12 billion, lower than the $12.8 billion in equity already invested in the company, and dramatically lower than the $47 billion valuation in January when SoftBank invested $2 billion.
Monday, September 16, 2019
Brooklyn Nets sixth man Spencer Dinwiddie signed a contract for $34 million over three years. Now, Dinwiddie hopes to digitize his contract into a digital token. The plan is to pay back investors principal plus interest from his future salary. For investors, an advantage is that the tokens will have little correlation with other financial assets. There are numerous examples of securitizing cash flow from future earnings, from Bowie bonds, physicians who sell part of the future revenue in their practice, to fledgling golfers, who get money from backers in exchange for future winnings. However, these assets are not without risk. In November 2015, Fantex pulled an IPO that planned to sell future earnings for running back Arian Foster. Foster retired from the NFL less than a year later after several injuries.
Interest rates continue to be at or near historic lows, which presents a unique opportunity for borrowers. And universities are beginning to realize the opportunity. Rutgers University announced that it would sell $330 million worth of 100-year bonds, and the University of Virginia recently sold 100-year bonds at a YTM of 3.23 percent. So far this year, $1.3 billion in century bonds have been issued. Corporate bond issuers Walt Disney and Coca-Cola have also issued century bonds. Demand for these bonds is being driven by low interest rates, causing investors to seek out yield in riskier investments.