Real-Time Payments

Many of you are probably familiar with near instantaneous money transfers using Venmo or Paypal. And while we discussed next-day ACH transactions in the textbook, in 2017, an interbank payment system was unveiled, the real-time payment (RTP) network. While only 130 banks out of the more than 9,600 financial institutions in the U.S. have adopted the system, these adopting banks cover 60 percent of demand deposit checking and savings accounts. Several challenges have prevented the adoption of the RTP system. For example, businesses do not seem to be concerned about speeding up payments by one day, especially in the current low interest rate environment. The biggest hurdle appears to be infrastructure, but expect this hurdle to be reduced when Jack Henry & Associates and Fiserv come online later this year. But the RTP system does provide other perks, including 24/7/365 access, instant confirmation, and settlement finality, meaning the sending bank can't revoke or recall a payment.

Green Bonds?

During 2020, a record $270 billion in green bonds were issued, and green bond issuance is on pace to surpass that record this year. And while we discussed covenants and the ability of bondholders to undertake legal action against the bond issuer for violating these covenants, as a recent article in the Wall Street Journal highlights, green bond investors have little to no recourse if the bond issuer does not use the bond proceeds for green projects. Even the definition of a green bond is somewhat nebulous. For example, Luxembourg packaging manufacturer Ardagh issued $2.8 billion of green bonds to fund the partial merger of its metal can unit. The green component of the bond? Ardagh committed to using an equivalent amount of the bond issue to purchase more recycled materials and increase energy efficiency. The bond was certified green by a leading independent agency.

Basketball TVM

Former NBA star Allen Iverson signed an endorsement contract with Reebok back in 2001. One of the terms of the contract was that Iverson would receive $800,000 per year for the rest of his life, plus a trust fund of $32 million on his 55th birthday on June 7, 2030. As an article about the agreement explains, Iverson may have received the worst of the deal, but we do have several problems with the analysis in the article. First, it is unlikely that Reebok would have offered Iverson $32 million in 2001 or $32 million on 2030. Reebok funded the trust with less than $32 million in 2001 with the intent that it would be worth $32 million in 2030. The second issue is a time value of money issue. The article notes that if Iverson had invested $32 million in 2001 at 5 percent, it would be worth $87 million in 2030. Check this for yourself and see if you don't agree that the future value of $32 million for 29 years at 5 percent is about $131.7 million. 

Shrinkflation

You have heard of inflation, deflation, and stagflation. Recently, you may have noticed shrinkflation. Due to rising costs of raw materials and labor, producers have begun to shrink package sizes. For example, ice cream maker Tillamook announced that it was shrinking the size of its cartons from 56 oz to 48 oz, a 14 percent shrinkage. Since consumers tend to look at price rather than package size, the move is intended to keep sales constant. Of course, shrinkflation is really inflation in another guise. In fact, the United Nations FAO Food Price Index make its biggest leap since October 2010, and reached its highest level since September 2011. Shrinkflation is not a new phenomenon, but it is an indication of rising inflation.

LIBOR End Is Near

The Financial Stability Board (FSB), which coordinates financial rules for G20 countries, outlined its new transition polices to move away from LIBOR by the end of 2021. A number of U.S. dollar LIBOR rates will be available until the end of June 2023, but can only be used for legacy contracts. The FSB is encouraging the use of overnight risk-free rates, which include SOFR in the United States and SONIA in Great Britain.

Corporate Cash Holdings Increase And Decrease

In a recent survey by the Association for Financial Professionals, 40 percent of companies increased cash holdings in the first quarter of the year, but 34 percent of companies reduced cash holdings. The 34 percent decrease in cash holdings is the largest in the survey history dating back to January 2011. Compared with the same period last year, 22 percent of companies have lower cash balances, while 43 percent have large cash balances. What these numbers indicate is uncertain. It could be that the reduction in cash balances is due to cash flow problems, or companies could feel more confident in the future and reducing excess cash.

GE Kicks Factoring

General Electric is serious about reducing the company's use of factoring. In 2018, the company factored about one-half of its receivables, but it expects eliminate all factoring in the near future. In 2016, the company even went so far as to sell receivables up to 5 years ahead of sales in order to increase the then current cash flow. A consequence of eliminating factoring is is that it will reduce cash flows this year. In fact, GE expects cash flows for 2021 to take a hit of $3.5 to $4 billion, but it will also reduce the interest paid on factoring. The elimination of factoring is also a signal that GE management is confident of future cash flows.  

Convertible Issues At Record Pace

There have been 97 convertible bond issues totaling $54.3 billion so far this year, a record pace. The average coupon on these bonds has been 1.41 percent, with 28 convertibles issued at a zero coupon rate. And the average conversion premium is 39 percent. One issue with convertible bonds is that dilution may occur if the bonds are converted. Companies often pay $10 million or more to protect against dilution. Some of the biggest issues and conversion premiums occurred in February and March, before interest rates rose. For example, in February, Expedia issued $1 billion in convertibles with a conversion premium of 72.5 percent, and Airbnb issued $2 billion in convertibles with a conversion premium of 60 percent. The large conversion premiums to indicate a high level of confidence by bond buyers.

I Bonds

While most people are familiar with EE savings bonds, fewer are familiar with I bonds. A recent article in the Wall Street Journal highlights I bonds and the advantages of these bonds. One major advantage is that I bonds are yielding an currently very high interest rate of 3.54 percent. This is impressive when you consider the bonds are virtually risk-free. By way of comparison, 30-year Treasury bonds are yielding about 2.25 percent. I bond yields are based on the inflation rate and can change every six months. You cannot redeem I bonds for 12 months, and if you redeem within five years, you pay a penalty of the last three months of interest. You can buy electronic I bonds at www.treasurydirect.gov in any amount from $25 to $10,000, or paper I bonds in $50, $100, $200, $500, or $1,000 as a tax refund. One way to tell that I bonds are good investments is that the government caps the annual electronic purchase at $10,000 per individual, with another $5,000 possible through the tax refund purchase.