CHARLES STURT UNIVERSITY
Student ID: 11514207
Student Name: Zoydulla Numanov
Task: The Australian Corporate and Government debt market
FIN 530 Assignement 2
Lecturer: Ruhina Karim
26.08.2013 * Executive summary
The purpose of this report is to review corporate and government debt market of Australia. The report illustrates effect of GFC to Australian corporate and government debt markets and how Australia managed debt market during that period. The main finding are that Australian economy was not effected in that extend as rest of the world. Australian banks were concentrated in domestic market rather than investing offshore. Also government provided guaranty which supported debt market and saved it
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This way government can stop speculation with high risky debts and protect pension funds and retail investors.
Lately, corporate debt market is short of supply. Investors, who are seeking for low risk and secured investment, do not have many options in terms of debt investment. Furthermore, debts are mostly sold through wholesale market rather than ASX. Retail investors have to invest to self-managed funds (trusts) in order to be able to invest to debt through wholesale. Table 1 clearly illustrates that only 0.7% of the self-managed super fund allocated to debt securities. Comparing to other fixed rate securities, corporate bonds vary rare as well. For example, there were only 5 issues with $400 million market capitalization, which is only 1.1% (see table 2) among ASX traded ones in November 2012 (O’Brien et al., 2012).
High risky bonds should provide higher return according with the risk related to the company. Also bonds are less risky than equity issued by the same company as in case of insolvency of an organization debt holders paid first and only after shareholders. Table 3 clearly illustrates that yield return increases according to risk, where government bonds are equalized to free risk issues (Davis, 2012). Corporate bonds yield coupon rate might fluctuate depending on rating of the company that reflects risk of the company. Investors also can gain or lose by selling bond in secondary market.
The private equity investors known as the general partners, use their capital along with the money borrowed from banks, to buy companies that they believe could be notably more successful with the right combination of talent, strategy and capital. Private Equity investment market has been the fastest growing market in the past 15 years for corporate finance, compared to other markets such as the public equity and bond markets. George (1996) wrote a book called ?The economics of the private equity market ' that examines the reasons for the market 's unpredictable growth over the past fifteen years and highlights the key features of that growth. It examines the economic basis of the private equity market, analyzes the market 's current role and development in corporate finance, and describes the market 's institutional structure. However despite its rapid growth and increased significant for corporate finance, it has received little attention in the academic literature or press.
A distinction is made between gross and net foreign debt. Gross foreign debt is the total amount of borrowing from non-residents. Net foreign debt is equal to gross foreign debt minus the sum of lending by residents of Australia to non-residents and official reserve assets held by the Reserve Bank. Net foreign debt is the preferred number to look at as it takes into consideration the possible positive impacts that the debt could mean such as borrowings for investment purposes. Gross foreign debt is normally focused by government oppositions to degrade the current government’s schemes. Another differentiation in looking at debt is between the private and public sector. Governments are no different to an individual or family, if you spend more than you earn then you will need to draw from your savings, if you don’t have enough savings you have to borrow. Despite claims that the government is forcing Australia into debt, after the mass spending during WW2 stopped government debt has fallen significantly with the current public sector only holding about 28.6% of Australia’s $955 billion net foreign debt (figures 1 & 8). This relatively low percentage means that while the government is in debt to other countries, as
The large debt sale from Actavis underscores how investors are buying up income-generating investments when yields on safe government debt remain low. Corporate bonds pay more yield than safe government debt to compensate for the greater risk that investors won’t get paid back. (Cherney, 2015)
While rising foreign debt is widely viewed as a concern, Glenn Stevens (2009) argues that it is not an issue since the imported capital is being used productively. This may be true to some extent however Australia has been in a significant amount of debt for a while. Although the investment benefits are substantial in Australia and we would be no where without the ability to borrow and accumulate debt, there are is much longer list of negatives linked to foreign debt.
The preferred stock is differed from common stock when a company goes bankrupt, preferred stockholders enjoy priority distribution of the company's assets, while holders of common stock don't receive corporate assets unless all preferred stockholders have been compensated (bond investors take priority over both common and preferred stockholders). Meanwhile, the preferred stock is differed from corporate bonds because they are vary in price for different reasons. If company earnings grow, the stock is almost certain to rise over time. The price of bonds depends on the prevailing interest rates. If interest rates rise, a bond becomes less attractive because it pays a fixed rate and the price will fall. Conversely, if interest rates fall, the bond price is likely to rise. Bonds are rated based on risk (how likely it is the issuer will be able to repay the bond at maturity). A
Another aspect that the article focuses on is the key events and trends in the global financial markets affecting the overall Australian market and Rio
It provides an evaluation of the bond issuer’s financial strength and ability to pay back the bond’s principle and interest. The bond rating also provides investors with some sense of security when investing in a particular firm. A higher bond rating implies a lower likelihood for the firm to default. Investors would feel more secured investing in such a bond, thus demanding a relatively lower rate of return. As such, high rated bonds enable the issuer to enjoy a lower cost of borrowing. A lower bond rating, on the other hand, serves as a negative signal to investors on the firm’s ability to repay debt obligations.
For instance, the share of sovereign debt held by banks in the Eurozone, in particular, has been more than twice in 2013 compared to that of 2007. (Becker and Ivashina (2014a)) Such an observation is evident despite the fact that European banks incurred substantial mark-to-market losses in 2009 on their peripheral sovereign holdings (Greece, Italy, Ireland, Portugal, Spain, or so called ”GIIPS”) and that in 2011 alone, banks on average lost 40 percent of their market value in an effort to increase regulatory capital ratios. (Acharya and Steffen (2014)) At the same time, banks sovereign debt portfolios have exhibited increased home bias. (Battistini et al. (2014); Acharya and Steffen
Similar to ABC, the PDs for REH remain constant at 0% both before and after GFC. The low PD in REH was mainly due to a high asset value but low liabilities of the firm, which has increased the distance to default. REH has been a leading supplier in plumbing and bathroom products with very low gearing ratios and very insignificant level of long term debts. This is due to REH’s strong cash position which minimal borrowing is required. Despite the slowdown of the economy due to GFC, REH was able to maintain its sales level as a result of the government stimulus package. Hence, maintain the strong cash position. The low debt level and strong cash position has provided strong confidence to the investors, which was evidenced by the share prices appreciation.
Miller and Modigliani’s second proposition focuses on the risks associated when a firm takes on more debt. “The expected yield of a share of stock is equal to the appropriate capitalization rate pk for a pure equity steam in the class, plus a
Investors’ on-off relationship with emerging market debt (EMD) was again on display during much of 2016: annual performance reached double-digit heights by September, before falling back in the three days following the US elections. Despite this seesaw pattern of returns, EMD finished the year as one of the best performing fixed income markets, underscoring the merit of having a strategic allocation to the asset class. Less obvious is what, if anything, investors can do to reap consistently more of the gains, and less of the volatility.
Among saving possible failing financial institutions, other goals of this institution includes preventing possible panic from spreading to the populace, preventing possible bank runs from happening also avoiding bankruptcy spreading from one bank to another due to liquidity issues.
Another wave of corporate bankruptcies hit the global economy during the period of Global Financial Crisis (GFC) and its ramifications are still reverberating through global markets initially causing a severe banking and credit crisis (Barney 2009). The GFC impacted the financial sector more severely than any other industries, but many other sectors were also
Though junk bonds do have undesirable impacts on investors and issuers, they do play a vital role in American finance market and have left a great amount of enduring legacies. There are a number of advantages that can fully demonstrate the importance and meaningfulness of junk bonds. Firstly, junk bond investments offer consumer and companies a flexible financial instrument to achieve maximum returns and increase interest payments. Milken, who took high-yield bonds from a cottage industry to one of the cornerstones of the financial industry, indicated that junk bond is a better bet than higher-grade bonds (Yago, 2003). In the current monetary environment with low-interest rate, junk bonds have served as one of the financial instruments offering a compelling yield. Therefore, investors have an incentive to take risks in searching for higher returns. As revealed in The Economist (2010), the issuance of junk bond had shown an increasing trend from the $150 billion up to $1 trillion and that the revival is likely to be driven by an updated research for junk bond by investors, people were disappointed with the poor returns on cash or treasuries. This means that junk bond provides investors with a broader way to make their asset get the maximum premiums. Secondly, junk bond can help enterprises, especially the small and medium-sized companies, be out of debt obligations. Indeed, many companies which are previously well-preformed in the business market run into financial
Organisations and governments across the world have become increasingly dependent on debt over the last few decades. Goods and services are provided on credit and debt is granted to organisations and governments by lenders in different parts of the world. The providers of credit facilities, also known as investors, require a certain level of comfort that the security issuer will be able to repay the debt.