Cash & Loans Advice Blog

Taking a credit should be an intentional activity

The accountability factor in building trust relates to your own actions. You can’t control what someone else does, but you can control what you do. If you’re sensing uneasiness or an awkward feeling with a partner, ask yourself: “What can I do?”You can move along the Partnership Continuum by attending to your own accountability. The law of reciprocity—others tend to give back what they have been given—works in building trusting relationships. One of my friends signs his e-mail with this slogan: “No act of kindness is ever wasted.” In everything we do, intention is important—especially if that intention is “other directed.” Trust is an outcome of our inputs. Even the smallest gesture intended to be giving, respectful, supportive, encouraging, or sympathetic adds value to a relationship.

Building trust should be an intentional activity. And since the development of trust is such an essential aspect of successful partnerships, organizations should support its development. This takes planning. When we are intending to enter a partnership, we must engineer our performance so that we’ll do what it takes to increase trust.When we care enough to plan, follow through, evaluate, and redirect our energies if necessary, we’re using our Partnering Intelligence.

Improving credit quality and decreasing spreads

The factors that drive the widening and the tightening of the basis are explained below:

Factors that pull protection tighter (negative basis):

• Strong demand from protection sellers because of the unfunded nature of CDS and a lack of desired exposure/liquidity in the debt market.
• Synthetic CDOs can drive default swap spreads tighter because the manager needs to sell protection in order to buy synthetic credit risk into these structures.
• The existence of a default swap curve in 1, 3, 5 and 10 years can offer investors a broader range of maturities to construct a better portfolio.
• Assets trading above par, that is, the protection seller is exposed to a lower amount than the cash investor.
• Improving credit quality and decreasing spreads/basis volatility (CDS _ high beta instrument).

Protection related to credit events

CDS are used to transfer the credit risk of a reference entity from one party to another. One party (the protection buyer) pays a periodic, fixed premium to another (the protection seller) for protection related to credit events on the reference obligation. If there is no credit event, such as default during the life of the swap, these premiums are the only cash flows . If a credit event occurs the protection seller is obliged to make a payment to the protection buyer. For physically settled contracts, following a credit event, the protection buyer delivers the defaulted reference obligation.

Cash settlement (par minus market value) is the alternative to physical settlement and is used less frequently in standard CDS but overwhelmingly in tranched CDOs. The 2003 ISDA definitions further clarify the three types of credit events:

• Bankruptcy
• Failure to pay
• Restructuring.

Just like cash bonds or loans, CDS transfer credit risk. To remove the interest rate component of a cash bond, a synthetic floating-rate note can be created via an asset swap which eliminates the duration and convexity exposure of the cash bond. An unfunded position in the bond would have to be financed in the repo market. A CDS is equivalent to a financed purchase of a bond with an interest rate hedge (selling protection through a CDS or buying a corporate bond, asset swapping the coupon to floating and financing the holding in the repo market).

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.

Techniques to boost internet credit options

Seven decisions can help to drive sales online:

Generate participation, ownership and commitment within the whole company and among senior managers in particular, so that a co-ordinated, cross-functional approach is taken that increases value for the customer and reduces costs for the business.

Ensure that the online sales strategy is all-embracing, enhancing existing activities and learning from past experience.

Simplify the customer’s experience so that the sales process is streamlined, with barriers to purchasing removed.

Ensure that the website is sticky and compelling. You want customers to remain at the site when they arrive, and to return frequently.

Focus on flexibility and efficient personalisation so customers are able to buy exactly what they want, how they want it. Avoid duplication and past mistakes; for example, avoid a complicated, high-cost solution when an effective, low-cost alternative is available.

Prepare internally for the changes that an internet sales strategy will deliver so that the company avoids investing too much, too little, too late or too soon.