Friday, November 18, 2016

Dollar Strengthens

With housing starts at a the highest point in nine years and the weekly jobless claims reaching a 43-year low, it appears that the U.S. economy is strengthening. As a result, it now appears likely that the Federal Reserve will increase interest rates in its December 13-14 meeting. This also lead to a stronger U.S. dollar as the dollar reached a 13 1/2 year high against a basket of six major currencies. The U.S. dollar reached its highest level against the euro in almost a year, and its highest level against the yen since early June.

Fewer Negative Bonds

As signs for a more expansionary U.S. monetary increase, the market value of negative yield bonds worldwide fell this week. Since June, the market value of negative yield bonds in the Bloomberg Global Aggregate Index has fallen 28 percent from the peak value of $12.2 trillion. An expansionary monetary policy will likely lead to higher interest rates and a steeper yield curve, at least in the short term. Japan is still the leader in negative yield debt, accounting for 58 percent of worldwide negative yielding debt.

Saturday, November 12, 2016

Financial Distress Costs For Sears

For several years, the performance of Sears Holdings has been declining. Now, it appears that the company's suppliers feel that the company may be headed toward bankruptcy. JAKKS Pacific announced last month that it would stop shipping toys to Sears' Kmart stores, fearing Sears would file bankruptcy, making collection on the receivables problematic. Now it appears that other suppliers have reached the same conclusion as at least six suppliers have reduced shipments to Sears for the same reason, including at least one supplier who stopped shipping to Sears entirely. Chairman and CEO Eddie Lampert had extended credit to Sears three months ago to stop speculation by suppliers and some Sears suppliers have been paid in 30 days rather the typical 60 to 90 days. Given that Sears is headed into the Christmas season, the biggest sales season for retailers, problems with suppliers could signal a spiral into bankruptcy for the company.

Tuesday, November 8, 2016

Record Treasury Bill Sales

The U.S. Treasury Department sold a record $65 billion in one-month Treasury bills at an interest rate of .27 percent. Even with the record dollar sales, the bid-to-cover ratio, that is the ratio of bids to available bonds, was only 3.39, which is the lowest level since March.

Bond Call Provisions

A callable bond is typically only callable on the anniversary date of the bond or coupon date. However, this is not a requirement as the bond indenture is an individual contract specific to that particular bond issue. A common reason bonds are issued is to finance the acquisition of another company. These bonds are generally callable if the deal falls through and the call price is often set at 101 percent of par. Bondholders can be hurt by this fixed price call provision as bond prices can rise in the intervening period between bond issue and the deal being terminated. For example, when Sysco’s bid to buy US Foods  feel through last year, bondholders lost $309 million as the bonds were called at 101, well below current market price, which had reached as high as 113.3. Now, major bondholders are pushing to change the call value of bonds issued to fund acquisitions to a make-whole call premium, which commonly used for bonds issued for purposes other than acquisitions.

Sunday, October 23, 2016

AT&T Buys Time Warner

AT&T announced that it had agreed to purchase Time Warner for about $85 billion. Under the terms of the deal, Time Warner shareholders will receive $107.50 per share, half in stock and half in cash. The share price represents about a 20 percent premium to Time Warner's closing price on Friday. Even though the terms of the deal have been announced, Time Warner shareholders and the Department of Justice still must approve the deal, and the chair of the Senate subcommittee on antitrust said the committee would examine the deal as well. Of course this is not the first time that Time Warner has been acquired: In 2000, AOL purchased Time Warner for $160 billion in one of the worst deals in history. In fact, the company had a $99 billion loss in 2003 and things went so bad, the merged company eventually changed its name back to Time Warner.

Monday, October 3, 2016

CEO Pay Ratio

The ratio of CEO pay to that of other workers has been a hot button topic and reports often peg the ratio at 300:1 or higher. A controversial part of the Dodd-Frank Act requires companies to begin reporting the CEO pay relative to the median compensation at that company. In a new survey of 117 companies, the majority of the companies reported a ratio less than 200:1. Surprisingly, the financial services sector, which has drawn considerable scrutiny for CEO pay, has a lower CEO pay ratio, in part because the wages in that industry are relatively high. Industries that have high CEO pay ratios tend to have mare part-time and less-skilled employees.