If your company is currently doing or plans to do business in China, this is a valuable webinar from PNC, the global bank.
The increasing use of the RMB in trade and capital market financing is changing the game, fundamentally.
Please click on the title image below or copy and paste the link into your browser. Registration is required.
http://event.on24.com/r.htm?e=596229&s=1&k=197B190412AC863B54D3AAFE0D084163
By Dennis McCarthy – (213) 222-8260 – dennis@mbsecurities.com -
The law firm, Latham & Watkins, has been a great source for valuable webinars. Recently, I highlighted one on preparing for the 2013 proxy season (link). This time, however, Latham produced a useful print article on venture loans.
A venture loan is a niche loan used by private companies, often venture-backed, to get capital which is less expensive than equity.
In the article, the authors provide a list of deal terms and valuable commentary as to what is most common, in their experience.
I was surprised to learn about a “change in management default”, apparently a frequent term. But the article covers many issues including typical loan maturities, covenants, collateral, prepayment provisions, etc.
Again, thanks to Latham & Watkins for continuing to provide helpful materials on the capital markets.
As always, please contact me to help your company to complete any capital market project.
Link to article: Checklist of Venture Loan Terms with Commentary
Dennis McCarthy – (213) 222-8260 – dennismccarthy@ariesmgmt.com
“Preaching to the choir”. In this case, the choir is me. It seems that every commercial banker I meet, tells me to advise my clients, or anyone who’ll listen, to lock in today’s low interest rates.
When I ask, “what’s the risk?”, I get a lecture that we’re in an interest rate bubble and that despite the Fed’s announcement about the Fed Funds rate, business loan rates will likely rise, especially after the election.
When I confess that I not only believe them but share their concern, I ask “what should a company do to lock in these low rates?”
Since most companies have floating rate business loans, the bankers’ most common recommendation is to enter into a swap arrangement to fix the rate.
The cost of the swap, especially after tax, is considered very low cost insurance relative to the risk of a rise in interest rates.
A swap is not the only way, however. Some bankers recommended fixed rate term loans or even public bond issues if the financing is large enough.
One of my clients raised its first high yield bond last week so I’m doing my best to help companies to reduce interest rate risk. My banker friends would be pleased that their preaching paid off.
I can help your company to lock in low current interest rates. Please contact me. Thank you.
On Youtube, next to my posts about interest rate risk such as “Behind the Headlines on Interest Rates” were a series of videos which visually chronicle the history of US Treasury interest rates along the maturity curve for the last 50 years with commentary by Dr. Donald R. van Deventer, founder of Kamakura Corporation. Displayed above is one of the videos entitled, “50 Years of Forward Rate Movements”.
In a great example of a picture is worth a thousand words, or in this case, 12,300 days of data, one can quickly sense (i) historical levels of benchmark US Treasury interest rates, (ii) the variations from the expected or classical term rate structure (which is more common than one would think), and (iii) the amazing volatility in benchmark US Treasury rates.
As my post “Behind the Headlines on Interest Rates” explains, there’s more to what a company pays in interest rates than just the benchmark US Treasury rates but this reveals the variability in those benchmarks themselves.
My thanks to Kamakura Corporation for creating these videos. The company’s Youtube channel is www.youtube.com/user/kamakuracorporation and its website is www.kamakuraco.com.
The Federal Reserve announced that economic factors “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”
This will, no doubt, influence interest rates through this period, but this is not the sole determinant of a company’s interest rate as noted in my post “Seems Smart Now“.
For example, the debt market for corporations, both large and small, is influenced by supply and demand factors in addition to the benchmark federal funds rate. The predicted reduction in demand for corporate debt by collateralized loan obligation (CLO) funds suggests that companies may see higher new issue interest rates. In contrast, any increase in demand by other lenders such as high yield bond and “relative value” investors may ease rates.
The recent post, “No Loan Left Behind“, by Randy Schwimmer of Churchill Middle Market Finance, now a unit of The Carlyle Group, describes these supply and demand forces at work on the larger size loan market (size above $100 million).
To support Randy’s view that high yield investors are supplying critical demand, this week one of my clients successfully priced its first high yield bond replacing other financing sources.
My message is that while Fed action gets the headlines, there are several other factors at work, behind the headlines, which influence a company’s debt rate.
Dennis McCarthy
(213) 222-8260
dennismccarthy@ariesmgmt.com
dennismccarthy@ariesmgmt.com
(213) 222-8260
With short-term interest rates at historically low levels, many small cap companies are funding all their capital needs with short-term debt.
Can you blame them? Small cap companies are borrowing at 2 to 3% floating rates or a bit more if swapped to fixed rates.
Yes, it is a short maturity, one to three years, but the lenders will extend it when due. They said they would.
Yes, we all know that old maxim, fund long-term assets with long-term capital but companies are saving so much in interest by borrowing short-term.
What’s the risk, anyway? If rates start to rise, companies can refinance with long-term capital then.
I hear this a lot. It worries me.
Interest rates may rise unexpectedly and fast. When the time comes to lock in long-term capital, there’ll likely be a rush to refinance.
First, who lends for 5 to 10 years – insurance companies, specialty lenders, the public bond market?
There are limits to how much and how fast these markets can absorb new debt.
Second, what will happen to interest rates? Spreads on corporate debt have already widened since this summer. What do you think will happen to interest rates when there’s a rush to refinance?
I’ve been encouraging small cap companies to be prudent, to borrow some capital long-term. Create a relationship with the long-term debt market now, before the rush.
In the rush to refinance, you’ll want your company to be the first in line because your company is already a known participant in the long-term debt market.
Now, that’s a smart move.
Please contact me to discuss this or any of my posts. Thank you.
dennismccarthy@ariesmgmt.com
(213) 222-8260
Lately, I’ve been struggling with what it will mean to live in a world of slow to no growth.
First, I tried denial. There can’t be a world without growth.
Pick up any company annual report or analyst research report, they always project growth.
It’s in our Wall Street DNA.
We need growth to cover our costs, to justify higher salaries, to reward our shareholders?
But, what if, as is now widely expected, we face a global slowdown for our near-term future?
How do we behave in a slow to no growth world?
We’re going to have to rethink many of our basic assumptions. Here are a couple which come to mind.
First, I think cost control will become more critical without revenue growth to bail us out.
Will this trigger a power shift in companies? Will the path to become CEO now run through accounting?
Second, I think that, without growth, current cash flow is king. There’ll be more skepticism about the promise of future cash flow.
Will this spark a rash of corporate acquisitions as large, cash-flowing companies gobble up companies with no or low cash flow?
On the financing front, with slow to no growth, will companies borrow more to get as much financial leverage as possible.
Or, will equity securities change? Will we see more companies begin to pay dividends or do regular stock buybacks to pay a current return to their equity shareholders.
These are just a few ideas. There are many more potential implications.
Please contact me to discuss the capital markets implications for your company.
My contact information is below. Thank you.
(213) 222-8260
Capitalmarketalerts.com
Living with slow to no growth
dennismccarthy@ariesmgmt.com
(213) 222-8260
Well, it’s the Fall of 2011, Wall Street has been highly volatile as fears of a new recession and disarray in the Eurozone dominate the news.
As I talk with clients and friends, the discussion always comes around to the question “now what?” What if my company needs capital? Where can I go?
First, there’s debt.
The debt markets are open for business. Based on my experience, finance companies and banks are lending. The public debt market is open too.
A borrower’s projections may get more “stress testing” now but interest rates are historically low.
Second, there’s asset sales
In part because debt is available, buyers are active. If your company needs to raise cash, you might consider selling a business.
I know companies who’ve raised cash in this manner. They’ve gotten good prices for the businesses sold and are now deploying the money.
Third, large cash-rich corporations may be a source of capital for your company.
Sometimes these relationships take the form of direct equity investments into your company but many times they take the form of JVs, licenses, cash advances or even simple grants.
These deals work when the relationship benefits the large company’s business, even if indirectly.
Lastly, don’t forget equity.
You may wish for higher prices when selling equity but you should also be pragmatic. You should ask yourself “how critical is the having cash now? What is the investment opportunity? Does it justify the cost of raising equity now?”
Again, my name is Dennis McCarthy. I’m happy to discuss funding options with you. My contact information is below.
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