Archive for October, 2010

What is Better, CFA, MBA, or CAIA? NPV Analysis…

Sunday, October 31st, 2010
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So, the age old question…what is more useful for a long term career in finance, the CFA, the MBA, or the CAIA?  Wait, a minute, what even is the CAIA?  This article will go through the pros and cons of pursuing each of these three certifications.  The upfront economic costs and opportunity costs of the MBA may be significantly higher than CFA requirements, but an MBA does certainly have many intangible benefits such as networking and develops a broader base of professional problem solving and professional skills.  The CFA is very targeted towards finance and investment management careers, and is now being sought out more and more by professional firms for the recruitment process.

The CFA, many argue, is also not as much as a door opener, as it is a career accelerator once one is already in a buy side or investments role at a firm.  Conversely, the MBA opens many recruiting possibilities for candidates interested in the recruiting process.  The CAIA is a relatively new exam focusing on the alternative investments field, and has yet to be tested for its impact on the job front.

WHAT IS THE CFA DESIGNATION?

The Chartered Financial Analyst (CFA) designation is an international professional certification offered by the CFA Institute to financial analysts who complete a series of three exams. To become a CFA Charter holder candidates must pass each of three six-hour exams, possess a bachelor’s degree (or equivalent, as assessed by CFA institute) and have 48 months of qualified, professional work experience. CFA charter holders are also obligated to adhere to a strict Code of Ethics and Standards governing their professional conduct.

The CFA is a qualification for finance and investment professionals, particularly in the fields of asset management and the research function covering stocks, bonds and their derivative assets. The program focuses on portfolio management and financial analysis, and provides a generalist knowledge of  other areas of corporate finance, securities valuation, and accounting.

Today, CFA Institute has more than 101,000 members around the world, including more than 89,000 CFA charter holders.

WHAT IS THE CAIA ALTERNATIVE INVESTMENT DESIGNATION?

Founded in 2002, the CAIA Association is the sponsoring body for the only globally-recognized designation for Alternative Investment expertise. Across the globe, the designation demonstrates mastery of alternative investment concepts, tools, and practices, and promotes adherence to the highest standards of professional conduct in private equity, real estate, distressed debt, and hedge funds.

The CAIA program’s diverse curriculum appeals to investment advisors, consultants and analysts, fund managers and administrators, accountants, lawyers, academics, and compliance and back office personnel.

Candidates include seasoned professionals looking to explore new areas within the AI markets, generalists wishing to add another asset class to their investment arsenal, and new industry participants seeking to establish a core understanding of alternative investment.

The CAIA Association is a dynamic organization that reflects its membership’s interests and provides them with a vibrant global network. We are committed to developing industry skills and educational standards, and provide the industry’s first and only designation for alternative investment specialists.

WHAT IS AN MBA?

The Master of Business Administration (MBA or M.B.A.) is a degree in business administration, which attracts people from a wide range of academic disciplines. The MBA designation originated in the U.S., emerging from the late 19th century as the country industrialized and companies sought out more scientific approaches to management. The core courses in the MBA program are designed to introduce students to the various areas of business such as accounting, marketing, human resources, operations management, etc. Students in some MBA programs have the option to select an area or multiple areas of concentration and focus approximately one-third of their studies in this subject.

Accreditation bodies exist specifically for MBA programs to ensure consistency and quality of graduate business education. Business schools in many countries offer MBA programs tailored to full-time, part-time, executive, and distance learning students, with specialized concentrations.

PROS & CONS TO DESIGNATIONS

In a recent article, Chad Sandstedt, CFA, discusses the following very well:

“It’s a question asked by nearly every aspiring finance professional at one time or another — is my time (and money) best spent pursuing the Chartered Financial Analyst designation or a Masters in Business Administration? There’s no question that both are valuable credentials, each are capable of delivering higher salaries and better advancement prospects. However, the answer to this question depends on many factors, including your professional goals, background and resources, both in terms of time and money.

What do you want to be when you grow up?
One obvious difference between the CFA program and an MBA program is the breadth of the curriculum. A good analogy is that the curriculum of the CFA program is a foot wide and a mile deep while the curriculum of MBA programs are a mile wide and a foot deep.

If you plan on working in finance, the CFA program will provide a wealth of knowledge. However, if your career path veers out of finance, the chances that you’ll be able to utilize the curriculum are limited. In contrast, an MBA program is likely to provide exposure across numerous fields of study that can be applied in almost any position, whether in finance or not. As such, potential CFA candidates are advised to step back and assess their commitment to a career in finance.

For those who are working in another field and view the CFA program as a way to break into a finance career, it may be more appropriate to first obtain a position in the field, even if it’s at an entry level, to assess your commitment to a finance career before beginning the CFA program.

What’s the Price of Admission?
One of the most popular motivations for enrolling in the CFA program or an MBA program is to create new career opportunities. Today, many finance jobs require either a CFA designation or an MBA. What’s the cost to become qualified for these positions? While there are no exact numbers for either the CFA program or an MBA program, we can make a few assumptions that will apply to many aspiring professionals.

First, let’s look at the cost of the CFA program. Our first assumption is that it takes, on average, four exams to complete all three levels of the CFA program. Enrollment and registration fees for four exams will cost $1,815 with early registration. The cost of preparation materials can vary widely between CFA candidates. At the low end of the price range is the purchase of study notes and textbooks. Realistically, many candidates require additional preparation such as study seminars, software, online programs, audio programs, video programs or flashcards. The cost of such a comprehensive study plan could be an additional $2,000 per year. Given our relatively aggressive assumption that all three exams will be successfully completed in four attempts, we will assume a fairly aggressive study plan with $1,000 of study material per year, for a total of $4,000 over four years. Therefore, the total cost of obtaining the CFA designation, including registration fees and test preparation materials, would be $5,815.

The cost of an MBA can range dramatically, from a part-time program at a state university to a full-time program at an Ivy League school, the costs may range from $20,000 on the low end to over $100,000 on the high end.

In summary, the cost of obtaining an MBA will range from four to twenty times the cost of the CFA program.

What’s Your Time Horizon?
In the previous section we listed an assumption that it will take the average CFA candidate four exams to complete all three levels of the CFA program. Up until December 2003, all three levels of the CFA exam were administered just once per year. In December 2003, the Level I CFA exam was available to be taken twice per year. If a CFA candidate takes the Level I exam in December, the Level II exam the following June, and the Level III exam one year later, it would take approximately two years if you assume that studying for the Level I exam begins in June. While this is certainly an achievable task and there are people who accomplish this, it’s becoming very difficult to do with lower pass rates and more demanding careers that allow less study time to prepare for each exam. Since we assume it will take four attempts to pass all three levels of the CFA program, we will assume these four exams will be completed in three years.

In contrast, most full-time MBA programs can be completed in two years. This is perhaps the biggest advantage of pursuing an MBA compared to the CFA designation, because it’s likely to qualify you for a better paying job about a year earlier than the CFA program will. If you’re able to increase your compensation by $30,000 with an MBA, you will be making $30,000 more than you will be making in the CFA program for an entire year.

I’ve developed a spreadsheet that computes the net present value of both the CFA program and an MBA program. For illustration, here’s a hypothetical scenario with the following assumptions:

Current Salary: $60,000
Cost of Capital: 5%
Time to Complete CFA Program: 3 Years
Annual Cost of CFA Program: $1,938
Projected Salary Post-CFA Program: $100,000
Time to Complete MBA Program: 2 Years
Annual Cost of MBA Program: $35,000
Projected Salary Post-MBA Program: $100,000

Based on these assumptions, the Net Present Value (“NPV”) of the CFA program is $204,394 while the NPV of the MBA program is $177,884. This means that, based on these assumptions, the CFA program is a better investment than an MBA program. However, a change in assumptions can change the answer. If you expect an MBA to deliver a higher salary than you expect after attaining your CFA charter, the answer may be very different. We’ve made this spreadsheet available so that you can use your own assumptions and see what alternative has the most value for you.

Self- Study vs. The Classroom?
Perhaps the biggest difference between the CFA program and an MBA is the learning format. The CFA exam is essentially a self-study program that allows candidates to move at their own pace and study as their schedule permits. There are no classes to attend unless you choose to sign up for a review course. There are no pop quizzes or progress exams, rather there is the equivalent of one big “final exam” for each level where you must be ready to apply everything you’ve studied.

The CFA Institute does provide a recommended study timeline that can be used to gauge your progress as you approach the exam date. However, it’s up to you to keep up and there will be nobody holding you to the schedule, so self-discipline is important particularly given the quantity of material covered at each level. A great number of very smart people have failed the CFA exam simply because they procrastinated and were unable to catch up.

In contrast, a traditional MBA program has a great deal of structure since it’s classroom based. Each class typically consists of several quizzes and exams so it’s easy to tell when you fall behind. The learning format in an MBA program is also more likely to be lecture-based, whereas the learning format for the CFA program is text-based.

So, What’s Best for Me?
For those individuals who are committed to a career in finance, the CFA program offers a unique opportunity to learn while you work. Very few professions have access to comparable opportunities to earn a renowned designation through self-study at a relatively low cost. However, if you’re relatively uncertain about a career in finance, an MBA may be a better choice since it applies to other fields.

In summary, there is no one-size-fits-all approach to continuing your education. Each individual brings a unique background with a unique set of goals. As such, it’s important to assess your own situation to determine which opportunity is right for you before you make a significant investment of time and money.”
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Posted in Asset Management, Career | 3 Comments »

Microlending Chaos: Suicides in India Due to Usurious Interest Burdens

Thursday, October 28th, 2010
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One of the big trends in finance over the past five years, has been microlending, lending to poor families and entrepreneurs in emerging economies at high interest rates. Lenders justify the rates by claiming that they need to cover the higher costs of originating these loans.  Unfortunately, due to the high investor inflows and saturation of this asset class, it looks more like the subprime industry than a financing vehicle for the underprivileged.  Poor families in India are now on the hook to pay off loans less than $200 at interest rates upwards of 100%.  We call this usury, loan sharking, or payday loans in the United States.  What Mohammad Yunus started with Grameen Bank is certainly not the viewpoint many private equity investors have in this asset class.  As a result, in response to dozens of suicides in India, local government officials have asked borrowers to actually stop paying back their loans, which has put a “black mark” on investing in these loans for the time being…we will see what comes of this twist in an effort which originally was started to benefit the impoverished.  Since when was it cool to take advantage of the powerless?  I guess this isn’t new at all…
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According to a recent article in the WSJ, “Urged on by local government officials and politicians, thousands of borrowers have simply stopped paying lenders, even though they have the money. The government has begun ratcheting up restrictions, fearing that borrowers are being buried by usurious interest rates. In some cases, officials have even arrested lending agents for allegedly harassing borrowers.
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Local politicians, meanwhile, have blamed dozens of suicides on microlenders and are urging borrowers not to pay back what they owe.
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Though so far the backlash has been confined to a southern Indian state of Andhra Pradesh, what happens there is frequently a bellwether for microlending in India, and programs around the world. Hyderabad, the state capital, is home to some of the world’s biggest microlenders, including SKS Microfinance Ltd., Spandana Sphoorty Financial, Basix & Share Microfin Ltd. The state accounts for about 30% of the loans for all of India, one of the world’s biggest microfinance markets.
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“This is potentially going to devastate lending to rural areas for a long time,” said Vikram Akula, founder and chairman of SKS Microfinance, India’s largest microlender by loan volume, which recently listed its shares in India. “We are confident that we will survive, but certainly this is going change how things could and should be done.”
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The son of Satyama Ayrene, left, hanged himself. It was because he owed money to loan sharks, she says, not that his wife owed $220 to microlenders. At right is Ms. Ayrene’s daughter-in-law Laxmi Narsamma
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Microcredit is the lending of tiny amounts of money, usually less than $200, to entrepreneurs who use the loans to start or expand small businesses such as a vegetable stand or a bicycle repair shop. Most microcredit firms lend money through women’s groups and reach out to borrowers who are either too far from or too poor to borrow from a bank. The repayment rate on the loans have tended to be better than that of richer borrowers. Interest rates, however, can be high, from 25% to 100% a year, mostly due to the cost of administering millions of tiny loans in remote areas.
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The crisis is in some ways reminiscent of recent debt problems in the U.S. Microfinance is targeted at a population that is overlooked by the mainstream banking industry, the same social niche targeted by payday and subprime lenders in the U.S.
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As the microfinance industry has grown, it has attracted international capital that has greatly boosted the size of the industry, much as payday lending and subprime borrowing soared until two years ago in the U.S. In a significant move that showed international investors’ interest in the industry, SKS recently sold $350 million of its shares on the Indian stock market.
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But along with that has come concern among politicians, regulators—and indeed some in the industry—that unfettered expansion was leading to poor lending practices, multiple loans to the same borrowers, and fears of widespread repayment problems.
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While they have been much in demand wherever they have been introduced as they provide a kinder, cheaper alternative to the village loan shark, some economists are skeptical about whether the small loans actually help lift people out of poverty.
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And in regions where there are more than one microlender competing for clients, some experts are concerned that the poor are being encouraged to take on more debt than they can bear.
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Private-Equity Money
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So far, the repayment rate across the microlending industry has remained extremely high. But Andhra Pradesh’s payment strike could presage a turn—and put the capital that has flooded into the industry at risk. Mainstream Indian and international banks have backed the microlending industry in India with more than $4 billion of loans this year, with private-equity funds pouring more than $250 million into the industry in India last year alone.
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The repayment strike is a rare black mark for an industry that has long been viewed as a social benefit. One of the industry’s leaders, Mohammed Yunus of Grameen Bank in Bangladesh, won the Nobel Peace Prize in 2006 for pioneering the system. The industry has spread across emerging Asia, Africa and South America. India, with its giant population and hundreds of millions of people living in poverty, is one of the most important markets.
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The industry also was the first to reach out to those that make less than $1 a day. It had been so successful that it has spawned efforts to bring everything from insurance to cellphones to solar lights to groceries to the poor.
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Andhra Pradesh slapped new restrictions on the industry that effectively shut it down last week. While a state court order put the restrictions on hold and allowed the lenders back in the field this week, close to half of all borrowers are continuing to avoid payments, microlenders say.
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State officials say they are trying to protect the poor from usurious interest rates and heavy-handed practices, which they say have triggered more than 70 suicides in the state.
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Microlending companies say that often where they have investigated suicides attributed to their lending, they have found that microloans were among the smallest of the many problems of the people that have killed themselves.
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In Sankarampet village about 2½ hours from Hyderabad, Satyama Ayrene is still in mourning over the death of her son who hanged himself. While local police say they have been told to investigate whether microdebt caused the death, Ms. Ayrene says it was the $2,200 he owed loan sharks that was bothering him, not the $220 his wife owed to a microlender.
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Misplaced Blame?
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“He did not commit suicide because of the [microloan] companies,” said Ms. Ayrene, 55 years old. “He was burdened with loans from the local moneylenders and didn’t know how to pay them back.”
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Microlenders say they are being punished for the success at reaching the poor and that if the resistance continues, many of them will go out of business. Many have been taking steps to create good will to try to avert the situation from worsening. The biggest lenders who account for the majority of borrowing say they will cap their rates at around 24% and form a fund to help troubled borrowers reschedule their loan payments.
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They say they are ready to comply with more government restrictions as long as they are given time to meet new requirements. But in the meantime, the industry has ground to a halt.
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When SKS agents arrived in a village called Shanti Nagar about 150 miles from Hyderabad, the capital of Andhra Pradesh, on Wednesday morning, they could tell right away something was wrong. The borrowing group of 20 women was milling around the dusty village square, instead of sitting in order in a circle with their weekly payments as SKS procedure requires.
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While the group wanted to pay its loans, they had been forbidden by a local political leader and their husbands, the women said.
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The political leader, A. Subramanyam, arrived and told the SKS agents not to harass his neighbors.
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“I told them if they don’t have the money, they don’t have to pay,” said Mr. Subramanyam. “I have seen them sell their wedding jewelry to pay the installments, why should they do that? No one here has prospered with these loans.”
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Urged on by local government officials and politicians, thousands of borrowers have simply stopped paying lenders, even though they have the money. The government has begun ratcheting up restrictions, fearing that borrowers are being buried by usurious interest rates. In some cases, officials have even arrested lending agents for allegedly harassing borrowers.

Local politicians, meanwhile, have blamed dozens of suicides on microlenders and are urging borrowers not to pay back what they owe.

Though so far the backlash has been confined to a southern Indian state of Andhra Pradesh, what happens there is frequently a bellwether for microlending in India, and programs around the world. Hyderabad, the state capital, is home to some of the world’s biggest microlenders, including SKS Microfinance Ltd., Spandana Sphoorty Financial, Basix & Share Microfin Ltd. The state accounts for about 30% of the loans for all of India, one of the world’s biggest microfinance markets.

“This is potentially going to devastate lending to rural areas for a long time,” said Vikram Akula, founder and chairman of SKS Microfinance, India’s largest microlender by loan volume, which recently listed its shares in India. “We are confident that we will survive, but certainly this is going change how things could and should be done.”"

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Posted in Microlending, Region: South Asia, Regulation | 2 Comments »

Leveraged Loan Market Update, Rankings 10/1/2010

Monday, October 25th, 2010
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The leveraged loan and high yield markets are currently on fire! Issuance is up 30% yoy, despite 2009 being a very strong year in issuances. Bank of America was leading the charge in market share, beating JPMorgan and taking 24%.  JPMorgan, the nearest bank was only at 14% market share, due to its conservative underwriting standards.

According to Ioana Barza of Thomson Reuters, “The U.S. syndicated loan market is firing on all cylinders heading into the fourth quarter. Although increased volatility is becoming a market staple and poses challenges for underwriters, the upside is that loan issuance has rebounded on the back of a strong bond market.

Lending activity in 1-3Q10, at $716.5 billion, was up 92% from the $372.8 billion in the same period last year, and up 30% over full-year 2009 levels, according to Thomson Reuters LPC. Although refinancing activity has driven roughly 70% of U.S. loan issuance this year, the pickup in activity in the third quarter has been dramatic. At $226 billion, 3Q10 volume is up 131% from 3Q09.

While lending has been stepped up, 63% of senior buyside and sellside lenders surveyed by Thomson Reuters LPC said constraints to get deals done remain as financings are still getting done selectively. Only one-quarter of respondents believe there are now few barriers to getting deals done, and a meager 12% said risk aversion runs high at their institutions and they are somewhat constrained.

After slowing to a crawl in May and June, the high yield bond and leveraged loan markets made a strong comeback in 3Q10. As investors regained their footing, many sought refuge in fixed income. High yield bond issuance surpassed 2009′s full-year record of $146.5 billion, with $173 billion in volume through Sept. 29. Investors followed the relatively attractive yields and bond fund inflows recovered after the dramatic pullback in the spring on the back of the Eurozone debt crisis and fears of a U.S. double dip recession.

2010 mutual high yield bond fund flows (including funds reporting monthly as well as funds reporting weekly) stood at +$7.681 billion, through late September, according to Lipper FMI, a Thomson Reuters company. Just as investors voted with their feet with $4.6 billion in outflows in the spring, there have been over $8 billion net positive inflows since mid-June.

With record inflows and bond issuance, it is noteworthy that nearly 40% of bond proceeds were used to pay down loans this year. While this virtuous cycle came to a halt, with less than $4 billion in monthly paydowns in May, through July, bond-for-loan takeouts climbed to the $9 billion range in August and September. With this extra cash from pre-payments to reinvest back into loans, CLOs made a slow comeback (albeit with recycled liquidity) and secondary loan bids began to climb, and continue to grind higher.

At the end of 2Q10, the SMi100 average bid was down over 2 points, while gaining 2 points in 3Q10. However, investors continue to be somewhat selective. Loans originated post-crisis (i.e. 2008 to present) remain higher bid relative to the 2006-2007 vintages. In fact, roughly 70% of 2010 vintage loans remain bid between 98-100, thanks to bells and whistles like call premiums, Libor floors and OIDs.

With these names already highly bid, investors began to focus on the primary market in hopes of a lineup of new issue. And after Labor Day, they got just that as the institutional pipeline doubled in size, deals were launched one after the other and many were oversubscribed. All told, leveraged issuance reached $75 billion in 3Q10, up 50% over 3Q09 volume on the back of new issue, which was $43.37 billion.

Equity sponsors became increasingly active, pursuing dividend recaps and financing a number of large LBOs. As a result, sponsored issuance reached $41 billion, with $16.5 billion in the form of LBO financings. There was a smattering of covenant-lite deals and nearly $5 billion in dividend recap financings in 3Q10, spread across 11 deals – a sign that arrangers were ready to test risk appetite again. However, the $12.5 billion total volume of dividend recaps done so far this year is on par with what was done in a single quarter in 4Q06 and 2Q07. Lenders expect this trend to continue with recent announcements for Metaldyne, Angelica and Euro-Pro.

New deals have been successful in attracting a range of investors and yields have begun to recede, with $15 billion in facilities flexing down in 3Q10 (versus $6 billion in upward flexes). On average, issuers saw primary yields (including Libor floors, contractual spread, and OID amortized over four years) come down to 6.95% in September from 7.67% in August.

Although loan yields are coming down in the primary, they remain attractive – and not just to CLOs. Crossover investors are increasingly active in the space and loan mutual fund inflows have surpassed well over $6 billion this year. Investors plowed money back into the funds, with the largest one-week inflow of $480 million recorded in September. With strong demand, hefty oversubscriptions and downward flexes, the institutional pipeline, which stood at roughly $13 billion by press time on Sept. 30, is up significantly from where it was in August and nearly double the level in early September. Today’s pipeline is still lower than the $16-18 billion highs seen in April and May, but it is widely expected to grow heading into 4Q10.

While all signs point up in terms of new issue in the leveraged loan market, lenders are not sitting back. Demand, driven by loan paydowns via the bond market, remains volatile. With unpredictable fund flows and moves in equities, which in turn move the bond market, the virtuous cycle remains fragile.

With a surge in new CLOs not expected any time soon and existing CLOs slowly going static as their reinvestment periods come to an end over the next couple of years, lenders are concerned about the financing gap and their ability to address the refinancing cliff. But, for now, issuers continue to rely on the bond market for relief and lenders hope the virtuous cycle will continue in the short term.

Meanwhile, investment grade lenders grappled with Basel III and its possible implications for the loan market. Under Basel III, revolving credits, which make up the bulk of the investment grade market and are largely undrawn, are currently included in the “liquidity coverage ratio” that requires banks to hold liquid assets equal to 100 percent of all undrawn credit lines used for liquidity purposes. Under this scenario, revolving credits would become prohibitively expensive. In turn, borrowers could bypass loans altogether and go straight to the bond market, or draw down revolving credits and repay them immediately, or borrow via term loans and reinvest the cash. However, it is possible that revolving credits could be instead classified as credit facilities that would attract a lower 10% liquid asset coverage ratio.

With the implementation period pushed back, nearly 60% of senior lenders surveyed by Thomson Reuters LPC said they expect some impact on investment grade lending in the short term, although more clarity is needed around which category revolvers will fall under and nearly 40% said they don’t anticipate any impact.

3Q10 investment grade lending was up 140% over 3Q09 at $78.76 billion. Although the investment grade loan market has seen an increase in volume recently, issuers continue to rely on the bond market and corporates continue to sit on excess cash. But volume was not anemic just due to a lack of jumbo M&A transactions. This has been coupled with issuers’ reticence to return to market to refinance existing debt. And when they do come to market, many are downsizing. More recently, however, lenders note that as spreads have tightened, more issuers are considering coming back to the market ahead of any regulatory changes. As a result, the refinancing pipeline for 4Q10 is building.

Will issuers opt for longer tenors? Lenders say clients are just not interested in that incremental duration (or the costs that come with it) as they have confidence that they can refinance as needed, especially as demand for the investment grade asset continues to outweigh supply. Still, while three-year revolvers have increasingly become the norm, a four-year revolver market is emerging as well.

Looking ahead, lenders expect that investment grade lending in 4Q10 will be up dramatically over 4Q09′s anemic levels. However, much of this will be driven by refinancing activity rather than M&A financings. Lenders expect spreads to come down across the board, given the strong demand and the absence of event-driven transactions. Already, over $100 billion in facilities have been structured with market-based pricing (MBP) this year, which has surpassed the $96 billion logged in 2009 and many anticipate this mechanism will remain in place going forward. Nevertheless, lenders note that pricing may not have found a floor because lenders are eager to put money to work and meet budgets as year-end approaches.”

U.S. Total Issuance ($Bils.) 3Q09 Issuance 3Q10 Issuance Percentage change
Overall 97.68 225.95 131%
Investment Grade 32.8 78.76 140%
Leveraged 50.18 75.35 50%
Institutional 13.85 45.34 227%
LBO* 0.6 15.14 2418%
U.S. New Money Issuance**
Overall 24.16 65.64 172%
Investment Grade 2.8 10.86 288%
Leveraged 15.04 43.37 188%
Institutional 5.62 25.12 347%

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Rank Bank Holding Company Volume # of Deals Market Share
1 BAML 157,700,244,830 607 22%
2 JP Morgan 137,483,001,086 369 19%
3 Citi 74,849,909,143 140 10%
4 Wells Fargo & Co 59,780,488,589 314 8%
5 Deutsche Bank 30,147,793,314 89 4%
Leveraged Issuances Q1-Q3
1 BAML 58,885,737,862 296 24%
2 JP Morgan 34,694,155,779 147 14%
3 Wells Fargo & Co 19,682,559,332 141 8%
4 Credit Suisse 18,808,586,326 67 8%
5 Deutsche Bank 18,660,721,917 64 7%
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Posted in Leveraged Finance, Region: North America | 2 Comments »

Goldman on Gold…Going Up!

Thursday, October 21st, 2010
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Goldman published this report on gold early this fall, and so far, so gold…Paulson’s gold fund must be doing pretty well…

With U.S. real rates declining, it makes sense that this commodity rose to nearly $1,380 just days ago because of the depreciation of the U.S. dollar currency.

In the report, Goldman cites U.S. 10 year TIPs sliding below 1.0%, suggesting gold is oversold.  Quantitative easing will only add to the hype…

Goldman Gold

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Posted in Asset Management, Documents, Equity Commentary, Goldman Sachs, Precious Metals | No Comments »

Google Gets Away with Paying 2.4% Tax Rate Overseas!

Thursday, October 21st, 2010
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Google only paid 2.4% taxes on its overseas income last year using a strategy called “Double Irish,” where it legally used a tax loophole allowing it to move income to tax shelters in Ireland, while shifting expenses to countries with high corporate taxes, like the United States and Europe.  In the U.S., the corporate tax rate is 35%, and in Britain, its 28%, so how exactly does Google do it?  Well, after shifting income into Ireland, it effectively moves funds from Ireland to Bermuda, where funds become difficult to track for the U.S.  This type of tax avoidance is common amongst Fortune 500 companies, and even more common for the large technology players, including Microsoft and Facebook.  Google was able to lower its overall tax rate to 22% last year using these tactics.  If it had paid 35% in taxes on all its income, the company’s stock price would fall about $150, according to stock analysts.
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According to Bloomberg writer Jesse Drucker, “Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda.
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Google’s income shifting — involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” — helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries.
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“It’s remarkable that Google’s effective rate is that low,” said Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Department. “We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent.” The U.S. corporate income-tax rate is 35 percent. In the U.K., Google’s second-biggest market by revenue, it’s 28 percent.
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Google, the owner of the world’s most popular search engine, uses a strategy that has gained favor among such companies as Facebook Inc. and Microsoft Corp. The method takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax. (See an interactive graphic on Google’s tax strategy here.)
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The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad as the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion euros.
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Countless Companies
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Google, the third-largest U.S. technology company by market capitalization, hasn’t been accused of breaking tax laws. “Google’s practices are very similar to those at countless other global companies operating across a wide range of industries,” said Jane Penner, a spokeswoman for the Mountain View, California-based company. Penner declined to address the particulars of its tax strategies.
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Facebook, the world’s biggest social network, is preparing a structure similar to Google’s that will send earnings from Ireland to the Cayman Islands, according to the company’s filings in Ireland and the Caymans and to a person familiar with its plans. A spokesman for the Palo Alto, California-based company declined to comment.
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Transfer Pricing
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The tactics of Google and Facebook depend on “transfer pricing,” paper transactions among corporate subsidiaries that allow for allocating income to tax havens while attributing expenses to higher-tax countries. Such income shifting costs the U.S. government as much as $60 billion in annual revenue, according to Kimberly A. Clausing, an economics professor at Reed College in Portland, Oregon.
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U.S. Representative Dave Camp of Michigan, the ranking Republican on the House Ways and Means Committee, and other politicians say the 35 percent U.S. statutory rate is too high relative to foreign countries. International income-shifting, which helped cut Google’s overall effective tax rate to 22.2 percent last year, shows one way that loopholes undermine that top U.S. rate.
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Two thousand U.S. companies paid a median effective cash rate of 28.3 percent in federal, state and foreign income taxes in a 2005 study by academics at the University of Michigan and the University of North Carolina. The combined national-local statutory rate is 34.4 percent in France, 30.2 percent in Germany and 39.5 percent in Japan, according to the Paris-based Organization for Economic Cooperation and Development.
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The Double Irish
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As a strategy for limiting taxes, the Double Irish method is “very common at the moment, particularly with companies with intellectual property,” said Richard Murphy, director of U.K.- based Tax Research LLP. Murphy, who has worked on similar transactions, estimates that hundreds of multinationals use some version of the method.
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The high corporate tax rate in the U.S. motivates companies to move activities and related income to lower-tax countries, said Irving H. Plotkin, a senior managing director at PricewaterhouseCoopers LLP’s national tax practice in Boston. He delivered a presentation in Washington, D.C. this year titled “Transfer Pricing is Not a Four Letter Word.”
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“A company’s obligation to its shareholders is to try to minimize its taxes and all costs, but to do so legally,” Plotkin said in an interview.
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Boosting Earnings
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Google’s transfer pricing contributed to international tax benefits that boosted its earnings by 26 percent last year, company filings show. Based on a rough analysis, if the company paid taxes at the 35 percent rate on all its earnings, its share price might be reduced by about $100, said Clayton Moran, an analyst at Benchmark Co. in Boca Raton, Florida. He recommends buying Google stock, which closed yesterday at $607.98.
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The company, which tells employees “don’t be evil” in its code of conduct, has cut its effective tax rate abroad more than its peers in the technology sector: Apple Inc., the maker of the iPhone; Microsoft, the largest software company; International Business Machines Corp., the biggest computer-services provider; and Oracle Corp., the second-biggest software company. Those companies reported rates that ranged between 4.5 percent and 25.8 percent for 2007 through 2009.
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Google is “flying a banner of doing no evil, and then they’re perpetrating evil under our noses,” said Abraham J. Briloff, a professor emeritus of accounting at Baruch College in New York who has examined Google’s tax disclosures.
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“Who is it that paid for the underlying concept on which they built these billions of dollars of revenues?” Briloff said. “It was paid for by the United States citizenry.”
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Taxpayer Funding
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The U.S. National Science Foundation funded the mid-1990s research at Stanford University that helped lead to Google’s creation. Taxpayers also paid for a scholarship for the company’s cofounder, Sergey Brin, while he worked on that research. Google now has a stock market value of $194.2 billion.
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Google’s annual reports from 2007 to 2009 ascribe a cumulative $3.1 billion tax savings to the “foreign rate differential.” Such entries typically describe how much tax U.S. companies save from profits earned overseas.
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In February, the Obama administration proposed measures to curb shifting profits offshore, part of a package intended to raise $12 billion a year over the coming decade. While the key proposals largely haven’t advanced in Congress, the IRS said in April it would devote additional agents and lawyers to focus on five large transfer pricing arrangements.
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Arm’s Length
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Income shifting commonly begins when companies like Google sell or license the foreign rights to intellectual property developed in the U.S. to a subsidiary in a low-tax country. That means foreign profits based on the technology get attributed to the offshore unit, not the parent. Under U.S. tax rules, subsidiaries must pay “arm’s length” prices for the rights — or the amount an unrelated company would.
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Because the payments contribute to taxable income, the parent company has an incentive to set them as low as possible. Cutting the foreign subsidiary’s expenses effectively shifts profits overseas.
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After three years of negotiations, Google received approval from the IRS in 2006 for its transfer pricing arrangement, according to filings with the Securities and Exchange Commission.
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The IRS gave its consent in a secret pact known as an advanced pricing agreement. Google wouldn’t discuss the price set under the arrangement, which licensed the rights to its search and advertising technology and other intangible property for Europe, the Middle East and Africa to a unit called Google Ireland Holdings, according to a person familiar with the matter.
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Dublin Office
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That licensee in turn owns Google Ireland Limited, which employs almost 2,000 people in a silvery glass office building in central Dublin, a block from the city’s Grand Canal. The Dublin subsidiary sells advertising globally and was credited by Google with 88 percent of its $12.5 billion in non-U.S. sales in 2009.
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Allocating the revenue to Ireland helps Google avoid income taxes in the U.S., where most of its technology was developed. The arrangement also reduces the company’s liabilities in relatively high-tax European countries where many of its customers are located.
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The profits don’t stay with the Dublin subsidiary, which reported pretax income of less than 1 percent of sales in 2008, according to Irish records. That’s largely because it paid $5.4 billion in royalties to Google Ireland Holdings, which has its “effective centre of management” in Bermuda, according to company filings.
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Law Firm Directors
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This Bermuda-managed entity is owned by a pair of Google subsidiaries that list as their directors two attorneys and a manager at Conyers Dill & Pearman, a Hamilton, Bermuda law firm.
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Tax planners call such an arrangement a Double Irish because it relies on two Irish companies. One pays royalties to use intellectual property, generating expenses that reduce Irish taxable income. The second collects the royalties in a tax haven like Bermuda, avoiding Irish taxes.
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To steer clear of an Irish withholding tax, payments from Google’s Dublin unit don’t go directly to Bermuda. A brief detour to the Netherlands avoids that liability, because Irish tax law exempts certain royalties to companies in other EU- member nations.
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The fees first go to a Dutch unit, Google Netherlands Holdings B.V., which pays out about 99.8 percent of what it collects to the Bermuda entity, company filings show. The Amsterdam-based subsidiary lists no employees.
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The Dutch Sandwich
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Inserting the Netherlands stopover between two other units gives rise to the “Dutch Sandwich” nickname.
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“The sandwich leaves no tax behind to taste,” said Murphy of Tax Research LLP.
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Microsoft, based in Redmond, Washington, has also used a Double Irish structure, according to company filings overseas. Forest Laboratories Inc., maker of the antidepressant Lexapro, does as well, Bloomberg News reported in May. The New York-based drug manufacturer claims that most of its profits are earned overseas even though its sales are almost entirely in the U.S. Forest later disclosed that its transfer pricing was being audited by the IRS.
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Since the 1960s, Ireland has pursued a strategy of offering tax incentives to attract multinationals. A lesser-appreciated aspect of Ireland’s appeal is that it allows companies to shift income out of the country with minimal tax consequences, said Jim Stewart, a senior lecturer in finance at Trinity College’s school of business in Dublin.
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Getting Profits Out
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“You accumulate profits within Ireland, but then you get them out of the country relatively easily,” Stewart said. “And you do it by using Bermuda.”
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Eoin Dorgan, a spokesman for the Irish Department of Finance, declined to comment on Google’s strategies specifically. “Ireland always seeks to ensure that the profits charged in Ireland fully reflect the functions, assets and risks located here by multinational groups,” he said.
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Once Google’s non-U.S. profits hit Bermuda, they become difficult to track. The subsidiary managed there changed its legal form of organization in 2006 to become a so-called unlimited liability company. Under Irish rules, that means it’s not required to disclose such financial information as income statements or balance sheets.
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“Sticking an unlimited company in the group structure has become more common in Ireland, largely to prevent disclosure,” Stewart said.
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Deferred Indefinitely
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Technically, multinationals that shift profits overseas are deferring U.S. income taxes, not avoiding them permanently. The deferral lasts until companies decide to bring the earnings back to the U.S. In practice, they rarely repatriate significant portions, thus avoiding the taxes indefinitely, said Michelle Hanlon, an accounting professor at the Massachusetts Institute of Technology.
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U.S. policy makers, meanwhile, have taken halting steps to address concerns about transfer pricing. In 2009, the Treasury Department proposed levying taxes on certain payments between U.S. companies’ foreign subsidiaries.
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Treasury officials, who estimated the policy change would raise $86.5 billion in new revenue over the next decade, dropped it after Congress and Treasury were lobbied by companies, including manufacturing and media conglomerate General Electric Co., health-product maker Johnson & Johnson and coffee giant Starbucks Corp., according to federal disclosures compiled by the non-profit Center for Responsive Politics.
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Administration Concerned
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While the administration “remains concerned” about potential abuses, officials decided “to defer consideration of how to reform those rules until they can be studied more broadly,” said Sandra Salstrom, a Treasury spokeswoman. The White House still proposes to tax excessive profits of offshore subsidiaries as a curb on income shifting, she said.
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The rules for transfer pricing should be replaced with a system that allocates profits among countries the way most U.S. states with a corporate income tax do — based on such aspects as sales or number of employees in each jurisdiction, said Reuven S. Avi-Yonah, director of the international tax program at the University of Michigan Law School.
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“The system is broken and I think it needs to be scrapped,” said Avi-Yonah, also a special counsel at law firm Steptoe & Johnson LLP in Washington D.C. “Companies are getting away with murder.””
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Posted in Region: North America, Vertical: Technology | 2 Comments »

Options Trading Guide (History, Analysis, Sample Trades)

Thursday, October 21st, 2010
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Here is a great guide for trading options.   I am attaching a preview below:

Options Trading Strategy Guide: Option Trading Strategies
As we described earlier, four possible option selections exist for a trader: (1) long a call, (2) long a put, (3) short a call, and (4) short a put. These four can be used independently, together, or in conjunction with other financial instruments to create a number of option-trading strategies. These combinations enable a trader to develop an option-trading model which meets the trader’s specific trading needs, expectations, and style, and enables him or her to anticipate every conceivable situation in the market. This trading structure can be adapted to handle any type of market outlook, whether it be bullish, bearish, choppy, or neutral.

ENJOY!

Options Trading Strategy Guide

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Posted in Career, Options Trading, Sales & Trading | No Comments »

NetSpend IPO Skyrockets 20% – Prepaid Cards Serving the Underbanked

Wednesday, October 20th, 2010
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NetSpend Skyrockets After IPO

Who would have thought that a prepaid card manufacturer could reach a $1.2 billion valuation?

IPO Details

On October 19th, NetSpend Holdings (NASDAQ: NTSP), a marketer and distributor of prepaid debit cards, was able to complete a successful $204 million initial public offering, rising over 18% in its first day of trading.  The IPO was one of the most successful of the summer.  Shares of NetSpend jumped to almost $14 on October 20th from their initial $11 IPO price.  The IPO proceeds were used by Oak Investment Partners to cut the investment firm’s stake in the company from 47% to 39%.

The company sold 18.5 million shares on the 19th, after pushing back the date of its debut due to the investigation of its customer Metabank by the U.S. Office of Thrift Supervision.   Competitor Green Dot Corp., the largest provider of prepaid debit cards has rallied 35% since July.  On the other hand, Meta Financial has fallen 60% since it was forced to shut down one of its credit card programs.

Valuation

According to Rolfe Winkler of the Wall Street Journal, investors were paying $550+ apiece for each share of NetSpend purchased through its IPO.  Netspend has an enterprise value (BEV) of about $1.2 billion, which implies a $590 valuation on its cards, whereas competitor Green Dot is valued at $630+ per card.   One reason for the high valuation may lie in the fact that pre-IPO investors cannot sell their stakes until April 2011.

Risks

The risk in investing in NetSpend lies in the fact that the company’s processing fees per card provide only $11 in revenue per month.  Marketing and distribution expenses are fairly high as well, and customers also only use cards for 1 year before cancelling.  Churn is a significant issue for the company.  This is why the company’s EBIT or operating margin is only about 15%.  Due to the emergence to competitors and market saturation, NetSpend’s growth has decelerated from 50% in 2006 to 20% in 2009.

Business Model

Since 2005, there have been a number of prepaid card providers that have emerged and have been targeting low income consumers underserved by banks.  NetSpend has about two million active cards and is the second largest player in the United States with 40% market share.  It attracts customers by promising no overdraft fees and minimum balances.  As more banks turn away from low income customers, there may be potential for continued growth in this market.  The company claims that $7.6 billion in transactions were made using its cards in 2009.

NetSpend cards are sold at 39,000 retail store locations and are used by 800 corporate employers who use NetSpend cards to pay employees without bank accounts.  The cards are also FDIC-insured and are Visa & Mastercard branded.

Market

Approximately 25% of households in the United States are underbanked, and are searching for alternatives to traditional bank accounts.  The industry has growth at a CAGR of 49% from 2005 to 2009 and has reached a market size of approximately $300 million.  The business is also scalable, with industry average EBITDA margins at 25%.

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Posted in Asset Management, Equity Capital Markets, Growth Equity, Initial Public Offerings, Region: North America, Vertical: Financial Svcs | 1 Comment »