Cash & Loans Advice Blog

How to make your loan more effective

would be better buyers of the bond and buyers of protection to maturity to lock in the positive carry.

Factors that widen the basis (positive basis):

• Strong demand from protection buyers such as banks or hedge funds
• Bonds can usually be funded in the repo market at or around Libor.
• If the bond becomes special the investor holds a repo market option that makes the bond more attractive than the CDS and tends to widen the basis (short positions in bonds cannot be locked in for years because of a nonexisting repo market).
• Deteriorating credit quality and increasing spreads/basis volatility or equity volatility (CDS = high beta instrument).
• Assets trading below par, that is an investor who pays $80 for $100 face value has less credit exposure than a protection seller at par. Therefore, the protection seller would demand a higher premium (spread) than the bond.
• Convertible bond issuance may lead to hedging credit risk to unlock “cheap” equity volatility.
• The cheapest to deliver option is a structural factor, which tends to widen the basis (protection buyer is able to deliver any qualifying loan/bond).

The default basis can also be viewed as a risk indicator. In general, the sale of default protection should be more attractive than purchasing a bond when the basis is high relative to the equity volatility of the firm and vice versa.

If a credit event occurs…

Selling short-term and buying long-dated protection leaves a forward short position, which would benefit from a steepening in the credit curve and vice versa.

Senior versus subordinated CDS strategies: The senior-to-sub spread differential in CDS is driven fundamentally by expected recovery values. If senior spreads are half those of subordinated, then the expected senior loss following default is half that of sub. A 50 percent senior recovery (50 percent loss) would imply a 0 percent subordinated recovery (100 percent loss) A potential strategy is to sell subordinated protection and to buy senior protection (weighted). It offers the chance to unwind at a profit if the seniorto-sub ratio mean reverts to historical averages (positive carry trade). If a credit event occurs, the payoffs will reflect the actual relative recoveries in sub and senior debt.

The significance of credit brands

A brand is a design, name or identity that is given to a product or service in order to differentiate it from its competitors. Brands are likely to remain a potent force in the future, not least because, in an increasingly unclear and uncertain world, they help customers understand what they are buying or are being offered. If you buy a Rolls-Royce, for example, you expect certain brand values such as quality, reliability and prestige.

Brands are complex assets, and like people they possess, to some degree, distinguishing features. One increasingly popular method of managing brands is to view them as having “personalities”. The Rolls-Royce brand has a high-class, high-quality appeal throughout the world, and retailers such as Wal-Mart and K-Mart built their reputations on homely convenience and low price. It is this concept of brand personality that highlights their power.

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.