Whole-business securitization Just the name "whole-business securitization" sounds like it should be the final exam in Advanced Financial Engineering. Like, okay, fine, you have securitized mortgages and credit-card receivables and auto loans and corporate loans and aircraft leases, now securitize everything! It has a certain conceptual oddness? The point of securitization is that you take some steady stream of cash flows, separate them from the vicissitudes of the operating business that created them, and sell that pristine package to investors. The pristine package is "bankruptcy remote"; if the operating business runs into trouble, the securitized assets will keep paying and the investors won't have to worry. But the point of whole-business securitization is that you take the cash flows of the entire business and sell that package to investors. It is bankruptcy remote from itself, somehow. Here's Bloomberg's Claire Boston: Franchised companies like burger restaurant Jack in the Box Inc. and massage provider Massage Envy are increasingly selling unusual bonds backed by most of their business. By pledging key assets like royalties, fees, and intellectual property to bondholders, companies can win investment-grade credit ratings on their debt and slash their financing costs, making their bonds higher quality even if their overall companies are still relatively risky. This year borrowers have sold more than $6.9 billion of these securities, known as whole-business securitizations, approaching the most on record, according to data compiled by Bloomberg. Fast-food restaurants used to be the main issuers of this debt, but a wider array of companies are jumping in. This year, in addition to Massage Envy, a group of preschools and a distributor of music royalties have sold the bonds. … For example Wendy's Co. sold $850 million of whole-business bonds yielding between 3.78% and 4.08% in June, which are likely to be refinanced in seven to 10 years. Those bonds won the second-lowest investment grade. A smaller unsecured bond that the company sold in 1995, due in 2025 and rated seven steps below investment-grade, yielded around 5.3% in June. Reducing interest payments by around 1.5 percentage points annually on $850 million of debt can translate to a savings of $12.75 million a year before taxes. ... In a typical security, a company with stable cash flows and a heavily-franchised business model pledges assets like royalties into a special entity that is immune from the bankruptcy of the parent company. The money generated from that unit can fund business operations and pay investors. Additional protections, like stipulations that divert cash to pay investors if business goes south, can elevate the securities to investment-grade ratings. The basic idea is that you have a company, and it does stuff, and it sells the stuff, and people send it money in exchange for the stuff. And in a traditional unsecured bond, when the company gets the money, it sends some of it to its bondholders and keeps the rest to pay its expenses. But in a whole-business securitization, what you do is, you put a little collection box between the company and the people sending it money. Instead of mailing their checks to the company, they mail it to Company Special Trust LLC, and the special trust opens the checks and sends some of the money to the bondholders and the rest to the company to pay its expenses.[1] In an ordinary company, if not enough money comes in to pay both the expenses and the bond interest, the company has to choose between paying necessary expenses and making required payments on its bonds. That is a hard choice, not just because the company's managers are profligate or greedy or whatever, but because if you don't pay the necessary expenses to run your business, your business stops running, so no more money comes in, so you don't have anything left to pay your bondholders. So maybe, in this situation, you file for bankruptcy, or ask your bondholders to restructure their debt; if they take less money now, then you can keep running your business and there might be more money for them later. The essential insight of the bankruptcy system, and of debt restructuring generally, is that sometimes it is in the creditors' interest not to be paid in full and on time, because the company needs the money to stay alive and they are better off with it alive than dead. In the securitization, though, the people running the special trust are collecting all the money and sending it straight to the bondholders; the people running the actual business just get what's left over. If it's not enough to pay the company's necessary expenses, the company doesn't get to make any sort of choice about what to do; it just doesn't pay the expenses and goes bust, while the bondholders continue to collect their money. Which is not obviously better? For the bondholders? Like if you have a first claim on the company's revenues, and the company doesn't have enough left over to keep the lights on, then it turns the lights off, and then revenues go down, and then what good is your first claim? If the revenues of the whole business are securitized, don't you need the whole business to stick around to keep making the revenues? I mean, it's fine; these deals happen in businesses like fast-food franchising where the revenue is pretty stable and you probably could turn off the lights at corporate headquarters for a few years without hurting revenue too much. The name "whole-business securitization" is a bit of an exaggeration; you are not quite putting the whole business in a box and then painting the box to make it look better than the business did. Still it sometimes feels a little like this pushes the idea of securitization to, and maybe beyond, its logical limit. The corporation itself is a mechanism for securitizing a whole business: You take a business (operating and franchising fast food restaurants), you put it in a box (the corporation), you issue senior claims (bonds) and junior claims (stock) against the revenues of the business. It seems as if there'd be diminishing returns from adding another box. Speaking of packaging a whole business We have talked a few times recently about the purpose of the corporation. Should corporate managers focus only on maximizing profits for shareholders, or should they be more broadly concerned about the welfare of their employees, customers and communities? Well, what would you maximize if you were running this company? The Sackler family would give up ownership of Purdue Pharma, the company blamed for much of the opioid epidemic, and pay $3 billion of their own money under terms of a settlement proposal to resolve thousands of federal and state lawsuits, according to a person familiar with the negotiations. ... A document outlining a tentative negotiated agreement, which was described to The New York Times, valued the family's and company's contributions at between $10 billion and $12 billion, including the $3 billion Sackler contribution. But it would not be a straightforward cash payout. The bulk of the funds would come from restructuring the company under a Chapter 11 bankruptcy filing that would transform it from a private company into a "public beneficiary trust." That would allow the profits from all drug sales, including the opioid painkiller OxyContin, to go to the plaintiffs — largely states, cities, towns and tribes. Like if you ran this public beneficiary trust that sells opioids, and your head of marketing came to you and said "we have a new ad campaign that we think will sell thousands of OxyContin prescriptions and make us a lot of money," would you say "well that will create a lot of profits that we can send to our beneficiary cities and states to pay for drug treatment programs," or would you say "wait hang on isn't the whole point here not to get more people addicted to opioids"? The financial interests of your beneficiaries, as quasi-shareholders, will tend to be the opposite of their interests as, you know, governments. Presumably the public beneficiary trust would err on the side of not pushing opioid painkillers particularly hard, but it strikes me as a tricky problem. If you don't market OxyContin at all, and doctors and patients switch entirely to competitor products, then you may or may not get the optimal level of opioid prescribing, but you probably get less money for drug treatment than the $7 to $8 billion of profits assumed in this settlement.[2] And as a matter of grim realism, states and cities might want to use the OxyContin billions for other purposes, and prefer continuing high profits over reducing the harms of opioid addiction.[3] You could imagine being a wise omniscient omnipotent central planner and doing a sort of societal budget for OxyContin. Like let's say you know in advance that the invention and development of OxyContin will produce $X of benefits to people in terms of pain relief, etc., and it will cost $Y in manufacturing costs and in social harms like addiction and overdoses.[4] Then you have $X – $Y = $Z of net social benefit (or harm). If $Z is greater than zero, then you know what to do. You send someone (patients, insurers, taxpayers) a bill for $X to pay for the benefits, and you write checks for $Y to someone (manufacturing employees, addicted people, drug-treatment programs) to pay for the costs. And you have $Z left over to distribute to someone. Conventionally, in our society, a lot of that leftover money tends to go to the people who came up with the idea for OxyContin, and the people who provided the capital to produce it, because we generally think that is the best way to incentivize people to come up with socially valuable ideas. (With a wise omniscient omnipotent central planner you might not need those incentives, but never mind.) If $Z is less than zero, you do the same thing, except that you send the inventors and funders of OxyContin a bill for the $Z deficit. Wait, no, that is not what you do at all! If $Z is less than zero, you just don't invent OxyContin! If something is, on net, socially harmful, you don't do it and then look around for someone to pay for the harms; you just don't do the thing in the first place.[5] Of course this is not how real life works, but it does kind of describe the thinking behind a potential settlement like this. Actually existing Purdue got paid $X for the benefits of OxyContin, but it has paid out way less than $Y for the costs, because it has not internalized most of the social costs. And so there are some big lawsuits to force Purdue to internalize those costs, and there might be a big global settlement that does that by, effectively, giving up all of Purdue's future profits to the people who are harmed. If those future profits are greater than the harms, then this is a financial windfall for the cities and states that will control the trust fund. If the profits are less than the harms, though, the whole enterprise is pretty disturbing. By the way: future profits. OxyContin has been generating a lot of profit for Purdue for a long time, and a lot of that profit has gone to the Sackler family that owns Purdue, and not all of it would come back in this settlement. "Purdue paid out more than $4 billion to family members between 2008 and 2016," and they'd pay back something like $3 billion in this settlement, though they'd also give up their other business, Mundipharma. "Sacklers to Remain Billionaire Family If Purdue Settles Opioid Lawsuits," says this Bloomberg headline. It's hard to exactly send the Sacklers a bill for the full amount of social harm done by opioids, even if you could calculate it precisely. I linked to it briefly yesterday, but here is a post by Adam Levitin about limited corporate liability, which he does not like. "Limited liability is a substantial, regressive cross-subsidy to capital at the expense of tort creditors, tax authorities, and small businesses," he writes. I am not sure I agree with everything he writes—I have a certain fondness for limited liability—but you can see his point! If you can create a product that generates huge profits and imposes huge social costs, take the profits as dividends, and then walk away from (some of) the costs by saying "well we are just shareholders, this is the company's problem," then that does seem like a problem. Okay then In my line of work I have gotten to know most of the great financial fantasies. The greatest is of course the "prime bank scam," a loose constellation of conspiracy theories which hold, roughly, that the Federal Reserve secretly trades trillion-dollar bonds with a bunch of big banks, at night (!!!), and for some reason they need you to help them out. But there are lots of other good ones. One big one involves the peddling of extinct debt: You get some pre-revolutionary Chinese bonds with large dollar numbers on them, bonds which have been in default for 70 years and which trade for collectible value on EBay. Then you find some suckers, you tell them that these are risk-free gold-backed Chinese government bonds, and you sell them the bonds for a lot of money. Then you call them up and tell them "there's a problem with our investment, turns out the Chinese government that we were counting on to repay our bonds has been overthrown by a bunch of communists and the bonds are worthless, no way we could have predicted that, nobody's fault, oh well," and neglect to mention that this all happened 70 years ago. It's a well-known scam and people get arrested for running it. The competition for "dumbest financial news of 2019" will of course be bottomless but here's a pretty strong entry from Bloomberg's Tracy Alloway: The Trump administration has been studying the unlikely prospect of reviving century-old claims on Chinese bonds sold before the founding of the communist People's Republic. The defaulted China bonds can be found in the attics and basements of thousands of Americans, or on EBay, where the certificates sell as collectibles for as little as a few hundred dollars each. The PRC, which succeeded the Republic of China after it replaced the imperial dynasty, has never recognized the debt, though that hasn't stopped decades of attempts to collect payment on it. Now, with Trump ratcheting up the trade rhetoric with China, holders of the antiquarian bonds are hoping he'll press their case, even as other parts of the U.S. government are accusing people of fraudulently selling the same paper. Ehhhhhhhhh. President Trump, U.S. Treasury Secretary Steven Mnuchin, and U.S. Commerce Secretary Wilbur Ross have met with bondholders and their representatives. … "With President Trump, it's a whole new ballgame," says Jonna Bianco, a Tennessee cattle rancher who leads a group representing pre-revolutionary China bondholders and who has met with the president. "He's an 'America First' person. God bless him." Ehhhhhhhhh. To be fair: "People familiar with the Treasury Department say the China bonds have been studied, but ABF's suggestions—including the possibility of selling the defaulted debt to the U.S. government to then exchange with China—aren't legally viable." Still the lesson here is that if you have some crackpot financial scheme that you'd like to run at maximum scale, you should probably get a meeting with the president, or at least advertise on Fox News. He has a trillion-dollar budget and a fondness for conspiracy theories. "Mr. President, did you know that the Federal Reserve trades trillions of dollars of government bonds with big banks every night, what I am suggesting is that the U.S. Treasury can get in on the action by wiring me a deposit," that sort of thing. Cut taxes and pay for it by digging up Yamashita's gold! Come on. Meanwhile: "Treasury Secretary Steven Mnuchin said that offering bonds with maturities of 50 to 100 years is under 'very serious consideration,' with officials conducting an intensive review," which seems pretty reasonable. Speaking of defaulted bonds I am a pretty big believer in efficient markets, which means that when - Argentina, which defaults on its bonds a lot, finally came out of its most recent default in 2016; and then
- in 2017 it sold a hundred-year bond; and
- there was strong investor demand and Argentina sold $2.75 billion of the century bonds at about a 7.9% yield; and
- every article about it was like "wait, seriously, Argentina has defaulted 8 times in the last 200 years, including just a minute ago, and now you want to lend it money for 100 years?"; and
- the investors were like yeah sure we're doing it;
I just sort of assumed that there was a logic to it, you know? Like it was not a secret that Argentina defaulted on its bonds a lot; the investors buying the bonds were not idiots, or deceived, and it was their money on the line, so if they were buying the bonds anyway then they had some reasonable answer to the extremely obvious "hahaha you're lending money to Argentina for 100 years, what?" objection. And in fact that obvious objection was exaggerated, and investors weren't betting on 100 years of Argentine fiscal probity. The bonds had a 7.125 percent coupon and were sold at 90 cents on the dollar, meaning that if Argentina stayed solvent for just 12 or 13 years the bondholders would get their entire investment back and then be in line for 87 years of free coupons. That's not so much to ask, is it? From the Financial Times in June 2017: Over that period, few are expecting any major upsets in Argentina. The worst that could happen is that Mr Macri's government disappoints and fails to win a second term. But even then, few envisage a return — in the next elections, at least — to the kind of populism that has been at the root of most of Argentina's defaults. But nope, the market was wrong and the dumb obvious objection was right! From the Financial Times today: Argentina's embattled government will ask its creditors including the IMF for more time to pay off $101bn of debts, as the country struggles to avoid a ninth sovereign default. The Latin American country was plunged back into crisis this month after reformist president Mauricio Macri suffered an unexpectedly heavy defeat in a nationwide primary election, which all but wiped out his chances of re-election in October. … Argentina plans to delay $7bn of payments on short-term local debt due this year and will seek a "voluntary reprofiling" of $50bn of longer-term debt — much of it held by foreign investors — as well as postponing the repayment of $44bn of loans already disbursed by the IMF. "Money managers and analysts from firms including Citigroup Inc. and Bank of America Corp. say investors are likely to recoup less than 40 cents on the dollar on its notes if Argentina reneges," reports Bloomberg, and the century bonds are trading in the low 40s now. The basic lesson of efficient markets is that a casual observer equipped only with common sense and a superficial knowledge of the news will generally not have better-than-chance odds of outguessing the aggregate prediction of professional investment managers with real money on the line. But, you know, sometimes! Elements! I have no real insights here but I just want to say that the Bloomberg Businessweek issue on the periodic table of the elements is a delight. Helium in Tanzania! Lithium in Serbia! Germanium at Bell Labs! Rhenium in Chile! Rare earths in Greenland! So many elements! Things happen The G, S and O in GSO Capital Partners have all left. Ex-Google Worker Elaborates on Claims About Executive Drummond. Mozambique and Bondholders Near $900 Million Restructuring. How Bayer-Monsanto Became One of the Worst Corporate Deals—in 12 Charts. Insider-Trading Suspect Loses Bid to Spike French Airgas Charges. Jack Ma Says 12-Hour Work Week Could Be the Norm. More Than Half of Top 50 Universities Now Offer Cryptocurrency-Related Courses. "I defy you to come to the mattress where I reside, eat a delicious blood meal and say what you have said there about how undesirable my presence is in front of my six to 800 larvae." Teens Are Using Instagram To Cast Each Other In Fake Broadway Shows. Virtual-reality firing. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] Another potential benefit of whole-business securitization is tranching. If you take all of a company's cash flows and issue claims of different seniority on them, the senior-most claims should have a much higher credit quality than the company as a whole. "In theory," I once wrote about whole-business securitizations, "if you can slice a company into infinitesimal layers, you can find a layer with any rating and risk characteristic you want. Whatever happens to Domino's Pizza over the next few years, it will earn at least $100; if you have a priority claim to Domino's first $100, then that claim ought to be AAA rated." Now theoretically this should not be a *real* benefit, because for every dollar of claims that becomes more-senior-than-average through tranching, you have another dollar that becomes more-junior-than-average, so your overall profile is the same: People will charge you a lower rate for the senior stuff and a higher rate for the junior stuff, but the blended rate will be just the same as it was for your undifferentiated stuff. (This is, roughly, called the "Modigliani-Miller theorem.") But maybe there are optical or investor-segmentation reasons why that would not be true and people would pay up more for the senior stuff than they'd pay down for the junior stuff. In practice, though, many whole-business securitizations seem to be tranched quite lightly, if at all, so the benefit does not really come from subordinating a bunch of creditors but rather from the structure itself. [2] Actually New Purdue would also "give its addiction treatment drugs to the public without cost," and "the value of the profits from the new trust and the drug donations is estimated to total between $7 billion and $8 billion," so the estimated profits are not $7 to $8 billion on their own. [3] By the way there are similar well-known issues with the tobacco settlement trusts. [4] Obviously every part of this is impossible in real life, reducing these benefits and harms to dollar amounts is controversial, etc., but we are imagining that you are quite a fancy central planner. [5] Again this is not in the general case predictable in real life. For instance drug regulators *are*, loosely, in the business of approving only drugs that they expect to be socially beneficial, but sometimes they are wrong. Also I am oversimplifying here and you could imagine doing things to reduce $Y and increase $X, rather than just taking a binary yes/no decision about whether or not to invent OxyContin. |
⇉〖OpenLoad〗 2020 Superintelligence PelÃcula Completa En LÃnea released 2020. story: La vida de Carol Peters se trastorna cuando es selecci...
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