ACF Tutorial 4: credit ratings of large SH, lending + share repurchases

  • Created by: charlie
  • Created on: 03-05-18 10:44
CRA + large SH: ISSUE
Investee's of large SH (asset managers) receive higher ratings on bonds from CRA
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CRA + large SH: conflict of interest type 1) + 2)
type 1) CRA paid by large SH (provides +ve rating to investees) but not paid by DH of investees (doesnt need to be accurate) type 2) Large SH exert power on CRA, DH of investees in large SH get distorted debt value
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CRA + large SH: reasons for providing favourable ratings bias
1) EXPLICIT: threat of intervention/ selling stake 2) IMPLICIT: pressure on analysts from 'savvy' investors to provide +ve ratings to investees of large SH
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CRA + large SH: solutions
1) International not-for-profit credit ratings agency 2) laws/ restrictions on ratings for SH >5% stake 3) transparency/ disclosure of relationship for SH >5% stake
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Relationship lending: definition
relationship factors built through repeated lending/ having other businesses with clients to learn about their creditworthiness
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Relationship lending: +ves/-ves
+VES: (1) Long-term (2) reduces info asymmetry issue (3) profitable SME's credit access in recession (4) less reliance on variable collateral (haircuts) -VES: (1) extra cost of info (2) less benefit in boom
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Transactional lending: definition
each loan is one-off single transaction (heavy focus on risk)
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Transactional lending: +ves/ -ves
+VES: (1) steady business stream (2) Volume driven -VES: (1) Short-term (2) lender + borrower gain less revenue in recession (less lending) (3) Economy recession deepens (less lending)
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Share buyback/ repurchase: definition
company repurchases shares (at MV) when there is less growth opportunities, decreases D/E ratio
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Share buyback/ repurchase: +ves (intention)
(1) Benefits from increasing debt (if financed by debt) (2) Lowers c.o.c (M&M Prop2) (3) EPS should increase (= share price increase = higher bonus') (4) should send +ve signal (undervalue shares + reinvesting in own company)
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Share buyback/ repurchase: -ves (reality)
(1) Sends out -ve signal (draws attention to other info/ bad in high-growth industry/ bad if managers also sell shares) (2) Investors readjust valuations (less cash + shares cancels out EPS increase)
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Carrying out a buyback: Open-market share repurchase (most common)
Announce amount will buy/ no indication of price/ timing/ execution (+ve: flexibility/ safety -ve: weak or even -ve signalling to investors about confidence)
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Carrying out a buyback: Fixed-price tender offer (most aggressive/ risky for larger buybacks)
Invites SH to tender (bid) shares to company over 20-30 days at premium price (+ves: strong signalling pushes share price/ -ve: risky as can send -ve signals)
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Carrying out a buyback: Auction-based tender offer (emergent for larger buybacks)
Annouce seeking tenders (bids) for amount of shares between x% - y% above MV (+ves: strong signalling pushes share price + flexibility/ safety)
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Card 2

Front

CRA + large SH: conflict of interest type 1) + 2)

Back

type 1) CRA paid by large SH (provides +ve rating to investees) but not paid by DH of investees (doesnt need to be accurate) type 2) Large SH exert power on CRA, DH of investees in large SH get distorted debt value

Card 3

Front

CRA + large SH: reasons for providing favourable ratings bias

Back

Preview of the front of card 3

Card 4

Front

CRA + large SH: solutions

Back

Preview of the front of card 4

Card 5

Front

Relationship lending: definition

Back

Preview of the front of card 5
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