Tuesday, September 17, 2019

A Stock Up In Smoke

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.

WeWork Postpones IPO

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

A Digitized Athlete

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.

Century Bond Issues Increase

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.

Tuesday, September 10, 2019

Ford: A Fallen Angel

Moody's downgraded Ford's bonds to Ba1, into junk bond territory. The downgrade was due to lower operating margins, weak earnings, and lower cash flow creation. Some of the increased costs are due to Ford's restucturing plan, designed to improve performance in the future. S&P and Fitch did not downgrade Ford's debt to junk territory, indicating a split-rating in the company's bonds.

Tuesday, September 3, 2019

Oil And Gas Bankruptcies

As we discussed in the textbook, financial leverage is a double-edged sword, increasing shareholder returns in good times, but causing financial distress in downturns. Since companies in an industry tend to have similar leverage ratios, a wave of bankruptcies can occur in that industry. The high leverage in the oil and gas industry appears to be reaching a tipping point as 26 oil and gas producers have filed for bankruptcy this year, almost matching the 28 for all of 2018. There is still a way to go to match the 70 bankruptcy filings in 2016, which was caused by low oil and gas prices.

Germany's Negative Yield Bond Sale

With about $15 trillion in value worldwide, the amount of bonds outstanding with negative yields is astonishing. And a recent bond sale by the German government added to this number. Germany sold million worth of 30-year, zero coupon bond824 million worth of these bonds that will pay back €795 million in 2050. The bonds originally had a YTM of negative .11 percent, but fell even further to negative .153 percent.