Cash & Loans Advice Blog

Remember about the role you play in a credit

When we work in partnership, it is important that we honor our word and do what we agreed to do. When we do this, we demonstrate in action that we are willing to deliver what we’ve promised. Thus we enable others to feel confident that we will do our part and to concentrate on keeping up their end of the agreement.

Failing to do our part undermines the alliance. Rather than working to complete the task, time must be spent to rebuild the trust in the relationship. Over time, the partnership will dissolve because one party or the other will no longer find value in the relationship.

A primary reason partnerships are formed is to help us accomplish a task we do not have the skills to do ourselves. It is important that partners accurately assess their competencies and technical capabilities— both their strengths and weaknesses. When a partner is caught offguard by the other’s failure to deliver what he promised, this has serious repercussions on both the task and relationship elements of the alliance. It undermines the trust in the alliance and, consequently, the relationship.

When a credit curve is steep

On the other hand, if one has a negative short-term view on a credit but believes it to survive for the next 5 years, its credit quality will improve significantly. This view can be expressed via buying a long-dated 30-year par asset swap and buying 5-year protection on the single name thereby creating a long forward spread position (or buying short-dated default protection and selling longer dated default protection). This position would benefit from a flattening of the credit curve.

A steep credit curve implies a steep forward credit curve. A forward default swap is buying or selling protection for the given maturity at a given point in the future at the forward CDS spread. For example, Munich Re senior 2-year protection is at 21 bp and the 7-year protection trades at 34 bp. Selling 2-year protection and buying 7-year protection results in a 5-year CDS two years forward (2 _ 5 spread) at a level of 40 bp.

The phase of the credit cycle

According to our correlation matrix high yield is best comparable with equities. The value of $100 invested in January 1987 in high yield and the S&P 500 Index. It can be said that investors realized similar returns over the period Jan. 1987–Dec. 2003. It brings more clarity into the relationship between high yield and equity markets. Obviously both markets are affected by similar macroeconomic factors, so that they show parallel fluctuations in risk. But it is important to note that high yield experienced less risk over this period, meaning that high yield returns experience less volatility than that observed with equities.

It shows historical yields in the high-yield market versus 10-year Treasuries and BBBs. The spread differential varies significantly depending on the phase of the credit cycle.

Reducing sales costs and improving credit efficiency

The internet enables sales people to have the latest, most up-to-date information to promote sales. This might include product information, testimonials, details of special offers and customer or market intelligence.

This information is particularly valuable when in-depth product information is needed, and it can be provided directly to distributors as well as the salesforce.

The internet allows products to be evaluated quickly and easily without assistance, which can be particularly valuable for complex products or rapidly evolving markets. As a result, product and technical experts can be used for greater value-added activities. Furthermore, if the sales system is effective, complex, customised price quotations can be prepared for customers, possibly without sales people intervening. This has various advantages: it provides an immediate response to customers’ enquiries, reduces the lead time for sales, ensures accurate hand-over of order details, and saves time and effort in taking and transmitting orders. In effect, everything is done better, more quickly and more costeffectively. It also provides accuracy, another hidden benefit of the internet. This not only increases speed but also leads to great reductions in waste. Furthermore, depending on the industry and product, it can lead to reductions in inventory costs as products are made to order.