Posts Tagged Private Annuities
A joint strategic planning of credit
Posted by admin in Business plans, bonds, budget, business, communication on February 15th, 2010
Everything you’ve done up to this point has been focused on getting you to the full partnership stage. You and your partner have worked hard together, navigating the Stages of Relationship Development to produce trust and mutual benefits. You’ve also engaged in the steps necessary to accomplish a task in order to determine the partnership’s worth. You’ve used the Plan–Do–Check–Act cycle to continuously improve the task and relationship dynamics of your partnership.
You’ve seen the partnership move from a past to a future orientation. The final two stages will feel almost anticlimactic. This is a good thing. You’ve worked so hard to increase your Partnering Intelligence that by the time you’re prepared to make a commitment and move to full partnership it will feel like the only logical step. The only thing that stands between you and full partnership is one more task: to conduct a joint strategic planning session in order to solidify your future vision and spell out the plans to get you there. Your partnership is now in the Commit Stage of Partnership Development. You have achieved the trust and communication needed to help you maximize the synergy. You have identified the mutual benefits that the partnership provides. Having managed the changing dynamics of the relationship and its impact on each organization, you are now positioned to perform.
How to compensate for default payday risk
Posted by admin in Global Markets, Money Tips, financial information, fixed costs, marketing, material costs on October 23rd, 2009
The spread needed to compensate for default risk depends upon future default rates, recovery rates and ratings transition probabilities. The rating agencies publish their forecasts of future default rates based on historical data. Usually required spreads come out significantly lower than current spreads for investment grade companies. For high yield, however, observed spreads tend to be too low, given the actual risk of default. While over the long term buy-and-hold strategies may earn an excess return over government bonds for pure investment grade portfolios, this strategy is not appropriate for high-yield portfolios. Here, investors need to focus much more on the process of selecting the right companies and avoiding the blowup names. A look at historical data shows that market spreads tend to overshoot at the end of credit cycles, especially in the wake of a recession.
For example, even if the historically high default rates of 1990/91 had persisted over the following years, investors should have required a BBB credit spread of only 115 bps for medium-term bonds. At that time the average market spread for BBB-rated issues, however, peaked at more than 180 bps.
Consequently, the market was much too bearish in 1991. Conversely, in 1997, at the beginning of the severe bear market for credit, spreads were too tight for the period of downgrades and credit blowups that followed. Note that these observations apply for bonds with a maturity of roughly 4 years.
While the cushion is not as comforting as for shorter maturities, even at the long end the spread levels reached in recessions provide sufficient protection, even when assuming that default rates stay high for a sustained period of time.