A second method to slice the corporate bond universe, especially the financial sector, is by different degrees of subordination. We discuss the characteristics of different types of bank debt in detail. In summary, Tier 1 preferred, Upper Tier 2 and Lower Tier 2 differ from senior bank debt in two major dimensions: with respect to loss absorption and interest deferral features. Both Tier 1 and Upper Tier 2 capital are able to absorb losses. But while missed interest payments are canceled immediately for Tier 1 issues they are repaid at a later date for Upper Tier 2 bonds. On the other hand, Lower Tier 2 debt contains no loss absorption features.
Category Archives: cash flow
Different degrees of loans subordination
Categories Aids finance, accounts recievable, bank deposits, checks, financial value, income
If the exuberant loans expectations would be fulfilled,
A lot of this M&A frenzy was financed by debt. Consequently, the balance sheets of many companies deteriorated rapidly. Doubts, if the exuberant profit expectations would be fulfilled, and concerns about company leverage initiated the decline in equity markets. The bubble burst when investors realized that they were not compensated for the downside risks associated with investing in overvaluated tech companies. When a few of the TMT newcomers began to struggle, investors had to acknowledge that there was no free money to be made in TMT IPOs. Highly leveraged balance sheets caused serious problems for some of the brightest stars of the equity hype, and for some of the big companies. Actually much of the equity bubble was concentrated on large cap companies.
Categories accounts recievable, automated systems, bank deposits, banking
Money managers dance better for a price
A money manager is not a psychologist for the difficult years. A money manager’s primary interest is in keeping your account, not helping you with your emotions. When the market and your account crash, a money manager is unlikely to admit his responsibility in loading up on overpriced stocks at the wrong time. More likely, he will attribute the loss to forces over which he is powerless and recommend you hold on for the certain recovery. Though recovery is never certain, and often takes decades, the money manager will be paid during the wait. Or the money manager might recommend a shift into less volatile bonds to quell your nerves. Typically, bonds require little research and monitoring for the money manager, and often they are chosen just as bond prices have peaked.
Your biggest liability working with a money manager is your sense of loyalty. You must be willing to cut and run when it becomes apparent that your money manager is not performing. Your ego also gets the best of you here. Beginning a conversation with “My money manager says…” indicates a degree of wealth and sophistication. “My index fund…” will only elicit boredom. Denial is not your friend either. You must analyze what your money manager is doing, get second opinions, and question him directly.
People pleasers will have difficulty here.
Categories accounts recievable, bank deposits, checks
Trade Discounts Can Add Up!
One of the untapped income sources for many companies is the trade discount offered for prompt payments. Many suppliers offer anywhere from a one percent to three percent discount if the invoice is paid within 10 days, as opposed the usual net 30 days and beyond. Use the following equation to predict your trade discount:
discount income = discount percent / (due date – discount date) x 360
Let’s assume our example company that receives a two percent discount on payments made within 10 days, rather than by the 45-day average established through weighted average invoice aging. That discount equation would be as follows:
2% / (45 – 10) x 360 = 20.5%
Unless the company’s cost of funds or interest earnings match or exceed 20.5 percent, the company gains more financial value if it pays within the trade discount period.
Many companies curry favor with suppliers by paying either prior to the due date or as an exception to their own weighted average. A company that does this should make sure the vendors know the company is making a policy exception and, if appropriate, why it’s doing so. If the company chooses to reward vendors with cash for some reason, the vendors should know why.
Categories bank deposits, due ammounts, economy, financial documentation, financial risk, financial value
Managing Disbursement: Where the Accounts Payable System Earns Its Keep – part 2
A good ACCOUNTS PAYABLE system can be used to forecast a payment schedule based on cash availability, anticipated income, and past policy practices. Then line up vendors in payment order, according to preference. Some will grumble, but the smart ones know they have little choice. If they don’t play along, it will take that much longer to be paid.
Vendors unhappy with your company’s payment policies won’t be vendors very long. Give preferred suppliers priority status and reward them with more prompt payment. They will likely return the favor with better service and more understanding if your company really gets into a bind.
Categories automated systems, checks, leverage, payment terms, suppliers, underwrite inventory
Managing Disbursement: Where the Accounts Payable System Earns Its Keep – part 1
The purpose of ACCOUNTS PAYABLE is to keep track of your company’s payables in an orderly fashion. But the advantage is that it enables a company to manage cash disbursement, allowing better control of cash flow and maximizing the value of funds to the organization.
As a rule of thumb, vendors meeting a company’s most critical needs—whether it’s raw materials or the retail items that are most popular or allow the highest markup—are paid first. Others follow as funds become available.
Sometimes cash flow is controlled out of necessity. There may be a snag in production or a liquidity problem that will require withholding or reducing some payments until the crisis is over. If that happens, the situation should be explained calmly and honestly to vendors. Chances are they’ve all been there and understand.
They will most probably want an estimated payment date. That’s where the ACCOUNTS PAYABLE system comes in handy.
Categories checks, due ammounts, financial documentation, financial risk, manual systems, payment terms
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