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Cash-strapped Greece repays first part of IMF loan due in March

By George Georgiopoulos and Lefteris Papadimas

ATHENS (Reuters) – Greece repaid on Friday the first 310 million euro instalment of a loan from the International Monetary Fund that falls due this month as it scrambles to cover its funding needs amid a cash crunch.

Prime Minister Alexis Tsipras’ newly elected government must pay a total of 1.5 billion euros to the IMF this month over two weeks starting on Friday against a backdrop of fast-depleting cash coffers.

“The payment of 310 million euros has been made, with a Friday value date,” a government official told Reuters, requesting anonymity.

Athens has to pay three other instalments, on March 13, 16 and 20 as part of repayments due to the IMF this month.

Tsipras’ government has said it will make the payments but there has been growing uncertainty over Greece’s cash position as it faces a steep fall in tax revenues while aid from EU/IMF lenders remains on hold until Athens completes promised reforms.

Athens sent an updated list of reforms on Friday to Brussels ahead of a meeting of euro zone finance ministers on Monday, a Greek government official said, adding that the list expanded on an earlier set of proposals.

The list includes measures to fight tax evasion and red tape and facilitate repayment of tax and pension fund arrears owed by millions of Greeks, the official said. It also proposes a “fiscal council” to generate savings for the state.

Athens is running out of options to fund itself despite striking a deal with the euro zone in February to extend its EU/IMF bailout by four months.

Greece has monthly needs of about 4.5 billion euros, including a wage and pension bill of 1.5 billion euros. It is not due to receive any financial aid until it completes a review by lenders of final reforms required under its bailout.

Greece’s central bank chief, Yannis Stournaras, said after talks with Tsipras on Friday that Greek banks were sufficiently capitalised and faced no problem with deposit outflows.

“There is full support for Greek banks (from the ECB), there is absolutely no danger,” he said after the meeting. But he added Monday’s euro zone meeting had to be “successful”.

The ECB will resume normal lending to Greek banks only when it sees Athens is complying with its bailout programme and is on track to receive a favourable review, ECB President Mario Draghi said on Thursday.

Athens has begun tapping cash held by pension funds and other entities to avoid running out of funds as early as this month. Various short-term options it has suggested to overcome the cash crunch have been blocked by euro zone lenders.

Tsipras’ leftist Syriza was elected on Jan. 25 on a promise to end the belt-tightening that came with the EU/IMF bailouts.

(Additional reporting by Renee Maltezou; Editing by Gareth Jones)

Politics & GovernmentBudget, Tax & EconomyInternational Monetary Fund […]

Exclusive – Greece to run out of cash by end-March without new aid -source

REUTERS – Greece is burning through its cash reserves and will not be able to meet payment obligations beyond the end of March at the latest unless it secures additional funds from its creditors, a person familiar with the figures told Reuters on Wednesday.

Athens is locked in a battle with euro zone partners over the future of its bailout programme, which is due to expire in 10 days. Failure to clinch a deal would leave it at risk of bankruptcy, though until now it had not been clear how much time Athens had until state coffers run dry.

Greece will be able to repay a 1.5 billion euro loan from the International Monetary Fund that falls due in mid-March, but the state will struggle to make payments after that despite continuing efforts to minimize cash needs, the person said.

“Greece can cover its needs until mid-March or the latest by the end of March unless it secures additional funding from official lenders,” the person told Reuters.

Athens has repeatedly asked its euro zone partners to be allowed to issue more Treasury bills beyond an existing 15 billion euro ceiling that it has already hit but its request has been denied.

Adding to the pressure, budget data for January showed the state’s finances worsening sharply as Greeks held off on paying taxes ahead of the Jan. 25 general election. That resulted in a 1 billion euro shortfall in tax revenues, 23 percent below the targeted level, putting the country’s bailout target of a 3 percent budget surplus this year in doubt.

Prime Minister Alexis Tsipras leftist-led government has sought to play down cashflow concerns, with ministers saying the state has enough money on hand and refusing to speculate on when it might run out.

Asked at a news conference on Wednesday about the state’s cash reserves, Deputy Finance Minister Dimitris Mardas said: “We are trying to pay our obligations all the time, I don’t have anything else to tell you.”

Earlier on Wednesday, the conservative daily Kathimerini said cashflow projections showed government coffers would start to run dry as early as Feb. 24.

After the March IMF repayment, Athens faces 800 million euros in interest payments in April followed by a major financing hump in the summer, when it has to repay about 8 billion euros to official lenders including 6.5 billion euros to the ECB for maturing bonds.

In addition, Athens also faces a monthly bill of 1.5 billion euros for public sector salaries and pensions, and an additional 1 billion euros a month for social security and healthcare costs.

Shut out of capital markets in 2010, Greece has survived over the past four and a half years on a continued stream of over 240 billion euros in aid from the European Union and IMF.

It broke its four-year exile from bond markets in April last year amid signs that the worst of its debt crisis was over, but the return was short-lived as bond yields rose to unsustainable levels in the autumn when political tensions rose.

(Editing by Paul Taylor and John Stonestreet)

Politics & GovernmentBudget, Tax & EconomyInternational Monetary FundAthens […]

Federal Regulators to Crack Down on Unaffordable Payday Loans …

Image Shawn-M.-Griffiths_avatar_1381172453-35x35.png

Feb 9, 2015

The New York Times

reported Monday

that federal regulators are expected to draft new rules to govern short-term loans, including car titles and payday loans, which to date have fallen mostly under the jurisdiction of individual state law. While many states have tried to put an end to short-term loans with exorbitant interest rates, payday lenders have found ways to get around these laws or have lobbied state legislatures to soften regulations.

“Such maneuvers by the roughly $46 billion payday loan industry, state regulators say, have frustrated their efforts to protect consumers,” the Times reports.

According to the report, the Consumer Financial Protection Bureau (CFPB) will soon take the first step by federal regulators to reduce the number of unaffordable loans lenders can make. The CFPB, created after the 2008 financial crisis, is an independent agency tasked with protecting consumers in the financial sector. Along with banks and credit unions, payday lenders fall within the agency’s jurisdiction.

In March 2014, the CFPB released a startling report on the realities of payday loans and the effect they have on low-income households and borrowers, the demographic payday lenders target most. The people lenders seek out are in desperate financial situations, and therefore do not thoroughly consider all the facts before signing up for these loans, the fees of which may end up being more than the initial principal.

The initial loan is typically a 14-day loan of no more than $500, though some can exceed this amount. According to the CFPB, these loans carry fees between $10 to $20 for every $100 borrowed.

“A $15 fee, for example, would carry an effective APR of nearly 400% for a 14-day loan,” CNN Money reports.

The CFPB found that over 60 percent of all payday loans are made to individuals who take out 7 or more loans in a row, meaning the accumulated fees end up being more than the initial amount taken out.

“60% of all payday loans are made to individuals who take out 7 or more loans in a row.”@ cfpb

“The bureau found that during a 12-month period, borrowers took out a median of 10 loans,” the Times reports. “Borrowers paid median fees of $458. The median amount borrowed was $350.”

People may recall the Montel Williams commercials for Money Mutual where he makes it sound like short-term loans are the most convenient solution for people who are having money problems and live paycheck to paycheck. Yet, according to the CFPB, these loans are only convenient for people who can pay them back immediately or after no more than one renewal.

For those who can’t, the challenge becomes getting out from under the debt.

“[O]ne Pennsylvania woman who took out a total of $800 in payday loans to help pay for rent after losing her job told the CFPB that she meant for the loan to be only short-term,” the CNN Money article says. “But after rolling over her first loan and eventually taking out another one to help pay for it, she has already paid more than $1,400 towards the debt and still owes more.”

There are currently 35 states that do not have laws regulating short-term lenders. However, even among the states that have made these types of payday loans illegal or have limits in place, lenders have found ways to get around the laws by reclassifying their stores as car-title lenders or using other similar tactics. New rules by the CFPB could make it harder for these companies to get around state regulations and could protect consumers in states that do not currently have these laws.

More articles in Economy

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How Quantitative Easing Is A Step Toward a Monetary Revolution

How America’s Tax Rates Compare With Other Countries

Independent Look at Obama’s Budget: More Spending, More Revenue, Less Deficit

Photo Credit: Lori Martin / shutterstock.com

About the Author


Shawn M. Griffiths

Shawn is located in the Dallas-Fort Worth area in Texas and has been actively involved in grassroots efforts in the state since 2005. His political philosophy is founded on the principles of individual liberty, limited government, and fiscal responsibility. He is not affiliated with any political party, and has great appreciation for intellectual independence and objective truth.

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[…]

Weak economy set to spur Reserve Bank cash rate cut on Tuesday

Concern about deteriorating economic growth lies behind the Reserve Bank’s determination to cut interest rates, a move most likely at its first board meeting for the year on Tuesday.

A cut in the bank’s cash rate from 2.5 per cent to 2 per cent would bring the standard discounted home loan rate below 5 per cent, knocking $53 off the cost of servicing a $350,000 loan.

Although the latest official figures show Australia’s unemployment rate falling, the Reserve Bank’s preferred measure shows it continuing to climb.

The bank averages the unemployment rate for each quarter and compares it with the average for the previous quarter.

Board members will be told on Tuesday that over the past year the average unemployment rate has climbed from 5.9 per cent to 6 per cent to 6.1 per cent to 6.2 per cent. The averages mean that abstracted from monthly “noise” there has been no let up in the pace at which unemployment is climbing.

The board will be told economic growth figures released since it last met show the annualised pace of growth slipping from 3.6 per cent to 1.6 per cent in the space of six months.

The bank’s previous forecast of rising economic growth published in November is now regarded as out of date and will be revised when new forecasts are issued on Friday.

No lift in business confidence

Board members will be told that neither consumer nor business confidence has lifted since the budget, as would be needed for economic growth to climb back to its long-term trend.

Retail sales are solid but not spectacular, maintained by discounting and weighed down by low wage growth and rising unemployment.

Inflation provides no impediment to cutting rates. The headline rate is now just 1.7 per cent after the collapse in oil prices. Importantly, the bank expects lower oil prices to continue to weigh down on inflation as they feed through into a myriad other prices, something it did not expect late last year when it looked as if the collapse in the oil price would be less severe.

Rather than focusing on the unexpectedly high rate of so-called underlying inflation in the December quarter, the bank is paying special attention to the rate of inflation on so called “non-tradables” – products that are not internationally traded, which is well down on where it was a year ago, reflecting low wage growth and weak consumer demand.

“Tradables” inflation, the rate on products that are internationally traded, is now negative despite the lower dollar.

The bank is minded to cut its cash rate despite doubts about its effectiveness in boosting the economy. It is concerned that another cut may simply reignite the investor housing market and it fears it could fail in its objective of encouraging businesses and consumers to borrow and spend more. While a boost to the economy from the budget would be preferable, it isn’t likely.

Another impediment is the statement the bank released after its December board meeting, saying “the most prudent course is likely to be a period of stability in interest rates”.

The bank believes that enough has changed since December to release it from the commitment. The oil price has collapsed, economic growth has weakened, and the steam has gone out of inflation.

It believes that if it is clear it has to cut rates, there is little point in waiting. And it is also concerned that if it doesn’t cut when it is clear it should, the Australian dollar will head back up after dropping.

Canada has just cut its cash rate to 0.75 per cent. Denmark has just cut its rate to minus 0.5 per cent. The United States is keeping its rate at 0.25 per cent. An Australian cash rate maintained at 2.5 per cent in the face of these moves would give the dollar support the bank would prefer it not to have.

The final decision will up be made by the nine members of the board, including the newly appointed treasury secretary John Fraser, who will meet in Sydney on Tuesday.

If they decide to keep the cash rate at 2.5 per cent in the face of recent developments, they are likely to indicate they intend to cut it soon, in March. But it is more likely that they will cut on Tuesday.

Peter Martin is economics editor of The Age.

Twitter: @1petermartin

The story Weak economy set to spur Reserve Bank cash rate cut on Tuesday first appeared on The Sydney Morning Herald.

[…]

Economics Daily Digest: Regulating payday loans, a hopeful look at …

By Rachel Goldfarb, originally published on Next New Deal

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Roosevelt Institute Fellow Saqib Bhatti’s proposal to allow the Fed to lend directly to municipalities is one of many ideas you can vote on in the Progress Change Institute’s Big Ideas Project. The top 20 ideas will be presented members of Congress. Voting ends on Sunday, January 11. Click here to vote!

CFPB Sets Sights on Payday Loans (WSJ)

Alan Zibel reports on the Consumer Financial Protection Bureau’s plans to explore creating new rules to regulate predatory payday lending, the first such rules on a federal level.

Consumer-advocacy groups say the loans are deceptive because borrowers often roll them over several times, racking up fees in the process. They also criticize high annual interest rates that can range from less than 200% to more than 500%, depending on the state, according to research by the Pew Charitable Trusts.

Early this year, the CFPB plans to convene a panel of small lenders to discuss its payday-loan plans, according to the people familiar with the matter. The bureau, like other federal agencies, is required to consider input from small businesses if regulations being developed are likely to have a significant impact on them.

Follow below the fold for more.

Signs of Economic Promise Are Offering Some Hope for the New Year (NYT)

Rachel Swarns reports on the positive signs that some are seeing, including new jobs for long-term job seekers and raises and more hours for workers at retail chains like Zara.

Don’t Believe What You Hear About the U.S. Economy (AJAM)

Dean Baker says it’s not yet time to celebrate an economic comeback. Growth is still slow enough that the labor market won’t reach pre-recession numbers by the end of 2015.

Why the Democrats Need Labor Again (Politico Magazine)

Timothy Noah interviews Thomas Geoghegan on his new book, which he describes as a “last-ditch effort for the Democrats” to revive the labor movement and win elections.

California Colleges See Surge in Efforts to Unionize Adjunct Faculty (LA Times)

Larry Gordon speaks to adjunct faculty at some of the private colleges in California that are seeing union organizing on campus for the first time.

Austerity’s End Strengthens U.S. Recovery (MSNBC)

Steve Benen corrects Grover Norquist’s attempt to give Republicans credit for economic growth, pointing to small increases in public spending as proof that austerity didn’t fix anything.

The Five Major Things We Screwed Up in Inequality in 2014 (The Guardian)

Suzanne McGee’s list includes the minimum wage, which she says needs a boost at a federal level, and race and economic opportunity, an issue she says we practically ignored.

[…]

Cash-strapped Ukraine expects IMF loan decision by late Jan

KIEV (Reuters) – Ukraine expects the International Monetary Fund to reach a decision on the disbursement of its next multi-billion dollar instalment of financial aid by late January, a senior presidential official said on Wednesday.

Ukraine has so far received two tranches of aid under the IMF programme worth a combined $4.6 billion, under a $17 billion (11 billion) bailout package agreed in April to shore up its foreign currency reserves and support the economy.

The third payment was delayed as the IMF waited for the formation of a new government, which has pledged to carry out the extensive reforms required under the bailout.

Ukrainian presidential adviser Valeriy Chaly said an IMF mission would visit Kiev in early January for the next round of talks on the loan programme, which the country has asked to have increased.

“We expect that all the decisions on macro-financial help will be reached by the last 10 days of January,” Chaly said in a televised briefing.

Ukraine’s foreign currency reserves have more than halved since the start of the year to a 10-year low due to gas debt repayments to Russia and efforts to support its struggling currency, the hryvnia.

Prime Minister Arseny Yatseniuk said Kiev, facing the additional financial burden of the rebellion in its eastern territories, risks defaulting unless Western donors come up with more funds in addition to what has already been pledged.

First deputy finance minister Ihor Umansky said on Wednesday that it was too soon to talk of restructuring the country’s debt.

“The question of restructuring … is not currently a subject of discussions,” he said at a briefing. “Until the aid package is agreed for Ukraine, it’s too early to discuss this.”

(Reporting by Natalia Zinets and Pavel Polityuk; Writing by Alessandra Prentice; Editing by Hugh Lawson)

Politics & GovernmentBudget, Tax & EconomyInternational Monetary FundUkraineforeign currency reserves […]

Finance companies, banks cash in on the festive spirit

Offers of cash-back, 0% interest rates and overseas trips made to woo buyers

Mumbai, October 21:

It is Diwali time again and banks and non-banking finance companies are trying to woo customers with attractive offers such as cash-back, zero per cent interest, ultra-quick loan approvals, extra reward points, and, in some cases, even an overseas trip.

The idea: Amid weak credit demand in the financial year so far, banks are trying to grab market share when the consumer propensity to spend is high.

Private lender HDFC Bank, for instance, is trying to entice customers to spend, by offering a range of discounts on the use of debit and credit cards for purchases.

Parag Rao, Senior Executive Vice-President, Business Head – Card Payment Products & Merchant Acquiring Services, HDFC Bank, said: “During the festive season, consumer spending is at the highest and credit card transactions are usually of bigger ticket size compared to cash.

“Hence, merchants and banks promote the usage of cards with these deals.”

HDFC Bank is offering various cash-back schemes, two-wheeler financing up to 90 per cent as well as reward points on credit and debit card purchases especially through e-commerce websites and at lifestyles stores.

Since the loan demand is weak, other banks such as State Bank of India, HDFC Bank and ICICI Bank are also relying more on reward points and various card and cash-back schemes to boost credit demand to ride on the consumer spending wave during Diwali.

Big ticket

India’s largest non-banking consumer finance company, Bajaj Finance, on the other hand is trying to woo customers by offering them a trip to Europe or a chance to win cars.

The Pune-based company is looking to increase its loan book size by 1.5 times during this festival period.

In the quarter ended September 30, the company reported assets under management of ?28,000 crore. Ever since the company launched a series of festive offers across the product categories, it said it has achieved 80 per cent of its target.

“With its ongoing festive sales, the company aims to increase its market share to 25 per cent (from 16 per cent now), effectively ensuring that one in every four consumer durables sold in the country is financed by Bajaj Finance,” the company said in a press note issued on Tuesday evening.

The company expects 25 lakh loan applications across product categories in a span of about a month through the promotional offers in the season. On the other hand, banks are trying to push their offers silently through the various distributors they have partnered with.

According to Rao, “HDFC Bank promotes these deals through various touch points. Customers avail these deals as they are over and above the discount offered by the merchant. Typically, the number of customers transacting in the participating merchants’ increases by two-three times during the offer period.”

(This article was published on October 21, 2014)

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advertising and marketing | promotions and offers | economy, business and finance | banking | financial and business service | NBFC | money and investing | credit cards and debit cards |What’s this?What’s this? […]

Loan waiver: govt. mulls giving cash, coupons

TOPICS

India

Andhra Pradesh

economy, business and finance

macro economics

macro economics

loans

economy, business and finance

The State government is planning to immediately provide cash of Rs.50,000 and coupon that can be cashed in six months or one year for the remaining amount to each eligible beneficiary of the crop loan waiver scheme.

Once the banks complete the process of identifying genuine beneficiaries and provide the government with the final list, a thorough scrutiny and final validation would be taken up, official sources said. In case, the bankers hand over the list by September 25 or 26 as promised by them, the government would try to finish the entire process by October 10 and all the details would be put online.

In the run-up to the elections, the Telugu Desam had promised to waive loans of farmers up to Rs. 1.5 lakh and those of DWACRA women self-help groups up to Rs.1 lakh.

While refusing to hazard a guess on the extent of fake or bogus crop loans taken by borrowers, the sources said there were different types of irregularities. For instance, there have been cases of multiple borrowings on the same land from two or three banks. “We want to come out with concrete figures only after validation,” the sources said.

The plan was to start with the lowest amount. It has been estimated that nearly 40 per cent of the borrowers come under the Rs.50,000 slab rate. In case there were 1,500 accounts in a branch, preference would be given to those in the Rs.50,000 bracket. If that was the case, the immediate outgo for the government would be Rs.10,000 or Rs.11,000 crore. The sources said for the rest of the borrowed amounts ranging from Rs.1,000 to Rs. 1 lakh, each farmer would get a coupon that could be cashed at a later date.

The government was also mulling buy-back option for coupons by the corporation proposed to be set up to deal with various aspects of farmers’ welfare. The corporation would buy the coupons and give cash to farmers who prefer to exercise that option.

Keywords: Andhra Pradesh Govt., cash coupons, cash Rs.50, 000,

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[…]

CDOs And The Mortgage Market

Collateralized debt obligations (CDOs) are a type of structured credit product in the world of asset-backed securities. The purpose of these products is to create tiered cash flows from mortgages and other debt obligations that ultimately make the entire cost of lending cheaper for the aggregate economy. This happens when the original money lenders give out loans based on less stringent loan requirements. The idea is that if they can break up the pool of debt repayments into streams of investments with different cash flows, there will be a larger group of investors who will be willing to buy in. (For more on why mortgages are sold this way, see Behind The Scenes Of Your Mortgage.)

TUTORIALS: Mortgage Basics

For example, by splitting a pool of bonds or any variation of different loans and credit-based assets that mature in 10 years into multiple classes of securities that mature in one, three, five and 10 years, more investors with different investment horizons will be interested in investing. In this article, we’ll go over CDOs and how they function in the financial markets.

For simplicity, this article will focus mostly on mortgages, but CDOs do not solely involve mortgage cash flows. The underlying cash flows in these structures can be comprised of credit receivables, corporate bonds, lines of credit, and almost any debt and instruments. For example, CDOs are similar to the term “subprime“, which generally pertains to mortgages, although there are many equivalents in auto loans, credit lines and credit card receivables that are higher risk.

How do CDOs work?
Initially, all the cash flows from a CDO’s collection of assets are pooled together. This pool of payments is separated into rated tranches. Each tranche also has a perceived (or stated) debt rating to it. The highest end of the credit spectrum is usually the ‘AAA‘ rated senior tranche. The middle tranches are generally referred to as mezzanine tranches and generally carry ‘AA’ to ‘BB’ ratings and the lowest junk or unrated tranches are called the equity tranches. Each specific rating determines how much principal and interest each tranche receives. (Keep reading about tranches in Profit From Mortgage Debt With MBS and What is a tranche?)

The ‘AAA’-rated senior tranche is generally the first to absorb cash flows and the last to absorb mortgage defaults or missed payments. As such, it has the most predictable cash flow and is usually deemed to carry the lowest risk. On the other hand, the lowest rated tranches usually only receive principal and interest payments after all other tranches are paid. Furthermore they are also first in line to absorb defaults and late payments. Depending on how spread out the entire CDO structure is and depending on what the loan composition is, the equity tranche can generally become the “toxic waste” portion of the issue.

Note: This is the most basic model of how CDOs are structured. CDOs can literally be structured in almost any manner, so CDO investors can’t presume a steady cookie-cutter breakdown. Most CDOs will involve mortgages, although there are many other cash flows from corporate debt or auto receivables that can be included in a CDO structure.

Who Buys CDOs?
Generally speaking, it is rare for John Q. Public to directly own a CDO. Insurance companies, banks, pension funds, investment managers, investment banks and hedge funds are the typical buyers. These institutions look to outperform Treasury yields, and will take what they hope is appropriate risk to outperform Treasury returns. Added risk yields higher returns when the payment environment is normal and when the economy is normal or strong. When things slow or when defaults rise, the flip side is obvious and greater losses occur.

Asset Composition Complications
To make matters a bit more complicated, CDOs can be made up of a collection of prime loans, near prime loans (called Alt.-A loans), risky subprime loans or some combination of the above. These are terms that usually pertain to the mortgage structures. This is because mortgage structures and derivatives related to mortgages have been the most common form of underlying cash flow and assets behind CDOs. (To learn more about the subprime market and its meltdown, see our Subprime Mortgage Meltdown feature.)

If a buyer of a CDO thinks the underlying credit risk is investment grade and the firm is willing to settle for only a slightly higher yield than a Treasury, the issuer would be under more scrutiny if it turns out that the underlying credit is much riskier than the yield would dictate. This surfaced as one of the hidden risks in more complicated CDO structures. The most simple explanation behind this, regardless of a CDO’s structure in mortgage, credit card, auto loans, or even corporate debt, would surround the fact that loans have been made and credit has been extended to borrowers that weren’t as prime as the lenders thought.

Other Complications
Other than asset composition, other factors can cause CDOs to be more complicated. For starters, some structures use leverage and credit derivatives that can trick even the senior tranche out of being deemed safe. These structures can become synthetic CDOs that are backed merely by derivatives and credit default swaps made between lenders and in the derivative markets. Many CDOs get structured such that the underlying collateral is cash flows from other CDOs, and these become leveraged structures. This increases the level of risk because the analysis of the underlying collateral (the loans) may not yield anything other than basic information found in the prospectus. Care must be taken regarding how these CDOs are structured, because if enough debt defaults or debts are prepaid too quickly, the payment structure on the prospective cash flows will not hold and the some tranche holders will not receive their designated cash flows. Adding leverage to the equation will magnify any and all effects if an incorrect assumption is made.

The simplest CDO is a ‘single structure CDO’. These pose less risk because they are usually based solely on one group of underlying loans. It makes the analysis straightforward because it is easy to determine what the cash flows and defaults look like.

Are CDOs Justified, or Funny Money?
As mentioned before, the existence of these debt obligations is to make the aggregate loaning process cheaper to the economy. The other reason is that there is a willing market of investors who are willing to buy tranches or cash flows in what they believe will yield a higher return to their fixed income and credit portfolios than Treasury bills and notes with the same implied maturity schedule.

Unfortunately, there can be a huge discrepancy between perceived risks and actual risks in investing. Many buyers of this product are complacent after purchasing the structures enough times to believe they will always hold up and everything will perform as expected. But when the credit blow-ups happen, there is very little recourse. If credit losses choke off borrowing and you are one of the top 10 largest buyers of the more toxic structures out there, then you face a large dilemma when you have to get out or pare down. In extreme cases, some buyers face the “NO BID” scenario, in which there is no buyer and calculating a value is impossible. This creates major problems for regulated and reporting financial institutions. This aspect pertains to any CDO regardless of whether the underlying cash flows come from mortgages, corporate debt, or any form of consumer loan structure.

Will CDOs Ever Disappear?
Regardless of what occurs in the economy, CDOs are likely to exist in some form or fashion, because the alternative can be problematic. If loans cannot be carved up into tranches the end result will be tighter credit markets with higher borrowing rates.

This boils down to the notion that firms are able to sell different cash flow streams to different types of investors. So, if a cash flow stream cannot be customized to numerous types of investors, then the pool of end product buyers will naturally be far smaller. In effect, this will shrink the traditional group of buyers down to insurance companies and pension funds that have much longer-term outlooks than banks and other financial institutions that can only invest with a three- to five-year horizon.

The Bottom Line
As long as there is a pool of borrowers and lenders out there, you will find financial institutions that are willing to take risk on parts of the cash flows. Each new decade is likely to bring out new structured products, with new challenges for investors and the markets. (For more insight, read Why Are Mortgage Rates Increasing?)

[…]

Must-know: Will Walter Energy survive the downturn?

Thumbnail

Being a pure play met coal producer isn’t good for Walter Energy (Part 9 of 9)

(Continued from Part 8)

Will Walter Energy survive the downturn?

Walter Energy (WLT) has been burning cash continuously for the past several quarters. The cash burn has forced the company to refinance the term loan with high cost notes. The move has simply extended the lifeline at the cost of higher interest expenses going forward. The company now has no major repayment obligation until 2018.

While the refinancing was possible in this case, the possibility of refinancing the maturing 2018 obligation will be weak given the recent downgrade by rating agencies. Also, if the company keeps burning cash for the next few quarters, the financial position of the company will deteriorate leading to the possibility of further downgrades.

One positive

One positive thing about the company during the quarter was that it has finally responded, or was forced to respond, to current oversupply in the metallurgical coal market by idling Canadian operations. The move along with similar initiatives, although “active” ones, taken by peers (KOL) such as Peabody Energy (BTU), Alpha Natural Resources (ANR), and Arch Coal (ACI) will help curb oversupply in the industry and may support metallurgical coal prices.

The company derives the majority of its revenues from exports to Europe and Asia. The Chinese purchasing managers’ index (or PMI) clocked a reading of 51.7 in July compared to 51 in June. Since PMI is considered to be an indication for the economy, a better reading translates to better days ahead for the economy and in turn fuel demand for steel. Metallurgical coal is used in steel production, which will make the metallurgical coal demand increase as well.

Will Walter Energy survive?

The answer to the question largely depends on two factors—the trajectory of met coal price and the met coal production in Australia. Right now, the met coal game seems to be the one in which everybody is burning cash hoping for good days ahead. Among its peers, Walter Energy is clearly at a disadvantage due to its “pure-play met coal producer” tag. However, it has bought time until 2018 through refinancing. The concern is whether the current liquidity with the company will last until 2018 or will the company be able to refinance in 2018 if met coal prices remain subdued.

Read the Market Realist’s Coal page to learn more about this important industry.

Browse this series on Market Realist:

Part 1 – Must-know: An overview of Walter Energy Part 2 – Must-know: State of the US metallurgical coal industry Part 3 – Why lower cash costs didn’t help Walter Energy make money FinanceBasic Materials IndustryWalter EnergyPeabody Energy […]