What Is Green?

Environmental, social, and governance (ESG) investing has become popular in recent years as investors have become interested in social concerns. And although ESG investing often relates to stocks, green bonds have also become more prevalent. Green bonds are intended to support sustainability and climate-related projects such as wind turbines or solar panels. Generally, these bonds are approved as green bonds by an outside agency such as the International Capital Markets Association. So what exactly is green? As a recent Verizon green bond issue shows, the definition can be somewhat murky. Verizon's $1 billion bond issue was classified as a green bond, with any green investments from 2017 to 2029 counting toward the target. What is interesting is that Verizon can count deployment of 5G technology and/or legacy network technology replacement toward green investing. Obviously, Verizon was planning on the 5G upgrade, but now it is a green upgrade.

Puerto Rico’s Bankruptcy

Bond covenants are generally inviolable, but bankruptcy can change that. Recently, Puerto Rico’s bankruptcy allowed the country to restructure sales-tax backed bonds. Owners of these bonds will receive 93 cents on the dollar, more than the bonds were recently trading for, but will give up half of the promised sales tax that was backing the bonds. This is better than Detroit’s general tax obligation bonds, who only received 75 cents on the dollar. However, other holders of debt of Puerto Rican debt received much lower payouts, an indication of the priority of claims in a municipal bankruptcy.

Dumb Money

A common belief among professional Wall Street traders is that dumb money, better known as retail investors, will flock to the market when stock prices are rising, then get out of the market after the stock has fallen. This sort of trading strategy will create a lot of losses, hence the term dumb money. During the stock market downturn in December, professional investors had a very low level of sentiment toward the market and left the stock market. And dumb investors poured $22 billion into passive index funds, reaping the reward from the recent market upturn. One possibility is that retail investors have become  believers in efficient markets, resulting in the money flowing into index funds, or at least they have been conditioned to understand that a market downturn can mean that stocks are on sale.

PG&E Files Bankruptcy

Several weeks ago, we discussed the possibility that PG&E might file for bankruptcy. Yesterday, PG&E made it official with its bankruptcy filing. PG&E listed assets of about $71 billion and liabilities of about $52 billion in its filing. The advantage of bankruptcy for PG&E is that it will slow down lawsuits that have been filed or will be filed in relation to recent wildfires in California. It is estimated that the company faces about $30 billion in claims from these wildfires. PG&E may take up to two years to emerge from bankruptcy.

Tesla Bond Coming Due

As we discussed in the textbook, there are many different types of bonds. Tesla has a bond coming due that is a convertible bond, but can be settled in cash and stock only if certain conditions are met.  At maturity, the cash component of the Tesla bond repayment is calculated by calculating a weighted average price for the 20 trading days prior to February 26, multiplied by a conversion ratio of 2.7788. The maximum cash payment is $500 per $1,000 bond, with the remainder paid in Tesla stock. However, for the stock component to become part of the settlement, Tesla stock needs to rise to about $360, a 21 percent increase in stock price. Unless the stock price hits this level, Tesla will be forced to settle the entire $920 million bond issue in cash.

Underwriting Risk

While some people are amazed at the money earned for underwriting stock offerings, it can be a risky business. Credit Suisse recently underwrote a 10 million share secondary offering for Canada Goose, known for its expensive coats and parkas. When the offering was made, in an unrelated incident, Huawei Technologies finance chief was arrested in Vancouver, sparking a diplomatic dispute between Canada and China. The arrest led to a Chinese boycott of Canadian brands, sending Canada Goose shares down by 20 percent. Credit Suisse was forced to sell the shares at a loss to the offering price or risk a further decline in the stock price. Reportedly, Credit Suisse lost $60 million on the transaction.

Lehman's Bankruptcy Tally

The Federal Reserve Bank of New York released a final (hopefully) estimate of the cost of the Lehman Brother's 2008 bankruptcy filing and the numbers are staggering. Compensation and benefit costs amounted to $1.97 billion, professional and consulting fees were $2.56 billion, and other operating expenses were $1.37 billion, for a total of $5.9 billion! This does not include the $1.36 billion paid out for the Security Investors Protection Act (SIPA)claims. While the bankruptcy costs (excluding SIPA claims) were about $6 billion, the number appears to be in line with other bankruptcies. Research indicates that bankruptcy costs are generally 1.4% to 3.4% of a company's pre-bankruptcy value. For Lehman, which had $300 billion in assets, bankruptcy costs were about 2% of assets.