Revenue Rise with Loans

I once worked with a telecommunications company whose mission included the goal “to maximize our stock portfolio.” The leadership decided this meant they should partner with a financial institution in order to manage their portfolio more efficiently. What they needed was a partner to help them—an investment bank—but what they did was acquire a bank [...]

The asymmetric distribution of corporate bond returns is easily explained by the Merton model introduced earlier. Numerous studies substantiate that even the return distributions of less risky and more liquid asset classes like government bonds are skewed and leptokurtic. Moreover, index returns exhibit significant autocorrelation that can be explained partially by a permanent component. Basically, [...]

Having focused on indicators for the overall level of leverage so far, we will now switch to metrics that relate the ability to generate cash flows and profits to the interest burden. This helps to better capture liquidity problems in the short term, but goes at the expense of understanding the longer term vulnerability of [...]

Yet, free cash flow numbers are not available for all companies. European firms, for example, historically have published only profit figures. Therefore, we also look at EBIT and EBITDA figures. Of these two the latter is preferred because it deducts cash that is needed to maintain the operations. Specifically, on the macro level we use [...]

So far, we have identified a close correlation between credit spreads and future economic activity. When the economy is growing, usually each sector benefits from that growth. In the labor sector, economic growth typically leads to falling unemployment and rising wages. Historically, the corporate sector has benefited particularly during economic expansions. Not only did corporate [...]

Generally, in growing economies the nominal level of debt rises over the years. This is mostly because of inflation and a steady growth in balance sheets. The long-term upward trend has accelerated sharply since 1980, coinciding with the sustained fall in short- and long-term interest rates and inflation rates. Since then, the steadily falling level [...]

For decades economists have analyzed the behavior of various economic indicators during the business cycle. Employment is commonly seen as one of the lagging indicators for the state of the economy. However, there is a leading indicator for the labor sector that coincides with changes in credit spreads. For example, for most of the time [...]