SECURITIZATION: A FINANCING STRATEGY FOR EMERGING MARKETS FIRMS

With emerging markets now in crisis, companies in developing countries are finding it difficult to obtain financing. Securitization, a transaction structure in which the securities sold to investors are backed by a company's receivables, is one of the few vehicles with at least the potential to provide financing at economic rates in the current environment of uncertainty.
Unlike U.S. securitization issues, emerging markets transactions often use a structure known as "future flows" securitization, in which the securities are backed by receivables that are not expected to be generated until after issuance. This article begins by describing how the process of future flows securitization carves out securities with levels of political risk acceptable to foreign capital market investors. Then it traces the history of emerging markets securitization from its origins in Latin America to its more recent uses during the Asian crisis. Securitization helped bring foreign investors back to Latin America after its debt crisis of the early 1980s. And while the Asian crisis has sharply reduced new issuance for all kinds of emerging market financings, the volume of securitization issues appears to have declined less precipitously than other types of transactions geared to foreign investors. Moreover, investment bankers are now hard at work planning new securitization issues for companies in both Latin America and Asia.
In exploring the longer-term effects of securitization on both domestic issuers and their economies, the author suggests that securitization could play a pivotal role in restoring emerging markets companies' access to global financial markets. Indeed, with a few exceptions such as Malaysia, most emerging markets are now responding to the crisis by taking measures to protect investors, such as requiring greater financial transparency and dispelling legal uncertainties that have discouraged securitization in particular and overseas investment more generally.     

THE CAPITAL STRUCTURE PUZZLE: ANOTHER LOOK AT THE EVIDENCE

Since the formulation of the M & M irrelevance propositions 40 years ago, financial economists have been debating whether there is such a thing as optimal capital structure—a proportion of debt to equity that maximizes current firm value. Some finance scholars have followed M & M by arguing that both capital structure and dividend policy are largely “irrelevant” in the sense that they have no significant, predictable effects on corporate market values. Another school of thought holds that corporate financing choices reflect an attempt by corporate managers to balance the tax shields and disciplinary benefits of greater debt against the increased probability and costs of financial distress. Yet another theory says that companies do not have capital structure targets, but instead follow a financial pecking order in which retained earnings are preferred to outside financing, and debt is preferred to equity when outside funding is required. In reviewing the evidence that has accumulated since M & M, the authors argue that taxes, bankruptcy (and other “contracting”) costs, and information costs (the main factor in the pecking order theory) all appear to play an important role in corporate financing decisions. While much if not most of the evidence is consistent with the argument that companies set target leverage ratios, there is also considerable support for the pecking order theory's contention that firms are willing to deviate widely from their targets for long periods of time. According to the authors, the key to reconciling the different theories—and thus to solving the capital structure puzzle—lies in achieving a better understanding of the relation between corporate financing stocks (leverage ratios) and flows (specific choices between debt and equity). Even if companies have target leverage ratios, there will be an optimal deviation from those targets—one that will depend on the transactions and information costs associated with adjusting back to the target relative to the costs of deviating from the target. As the authors argue in closing, a complete theory of capital structure must take account of these adjustment costs and how they affect expected deviations from the target.     

Bloomberg Intelligence Roundtable on The Theory and Practice of Capital Structure Management

Since the formulation of the M&M propositions almost 60 years ago, financial economists have been debating whether there is such a thing as an optimal capital structure—a proportion of debt to equity that maximizes shareholder value. Some finance scholars have followed M&M in arguing that both capital structure and dividend policy are largely “irrelevant” in the sense that they have no significant, predictable effects on corporate market values. Another school of thought holds that corporate financing choices reflect an attempt by corporate managers to balance the tax shields and disciplinary benefits of greater debt against the costs of financial distress. Yet another theory says that companies do not have capital structure targets, but simply follow a financial “pecking order” in which retained earnings are preferred to outside financing, and debt is preferred to equity when outside funding is required. In this roundtable, a leading finance professor is joined by six practitioners in discussing whether and how capital structure decisions and payout policies can create value, with special attention to the healthcare industry. The consensus is that for those parts of the pharma industry with large growth opportunities, equity financing should be the main source of capital. But for those parts of the industry with shrinking prospects, increasing levels of debt and raising dividends are recommended.     

MERTON MILLER'S CONTRIBUTIONS TO MODERN FINANCE

Winner of the 1990 Nobel Prize in Economics, and widely regarded as the “father of modern finance,” the University of Chicago's Merton Miller died last June at age 77. This article attempts to sum up Miller's career in terms of a single governing principle: the role of arbitrage in ensuring the “efficiency” of financial markets and, more generally, the effectiveness of such markets in promoting economic growth and creating social wealth. Starting with the formulation of Proposition I (also known as the capital structure irrelevance proposition) with Franco Modigliani in 1958, Miller's research over the next 40 years is seen as applying—with remarkable clarity and consistency—the principle of arbitrage to the study of many aspects of financial markets. Miller's main accomplishment, according to the author, is to have made arbitrage arguments the cornerstone of modern finance. The arbitrage proof of Proposition I introduced a new standard in finance—namely, that any finding in financial research deserving serious consideration must have the critical property that it cannot represent opportunities for riskless profit by investors. And the article goes on to show that arbitrage is a constant theme in Miller's writings, from his work in corporate finance to his later studies of financial innovation, derivatives markets, and financial crashes and crises. Having started and presided over the transformation of financial studies from a “glorified apprenticeship system” into a scientific discipline, Miller devoted much of the last 15 years of his life to a different, though clearly related undertaking: the defense of financial markets against the attacks of politicians and regulators, as well as businessmen intent on stifling competition (including hostile takeovers). Whether it was the alleged role of the stock index futures markets in the 1987 market crash, the claims of “overleveraging” in the LBOs of the '80s, or the derivatives fiascos in the mid‐'90s, Miller was there to provide careful economic analysis of the problems. In the early '90s, he explained why the “myopia” of the U.S. stock market was likely to cause far fewer problems than the “hyperopia” induced by regulatory distortions of the Japanese market. And in one of his last speeches, Miller showed that the primary cause of the recent Asian crisis was not “too much reliance on financial markets,” as claimed by politicians and the popular press, but “too little”—in particular, the heavy dependence on bank financing (particularly state‐owned banks) and the failure to develop alternative sources of capital that continue to depress the Japanese economy.     

Syndicated Leveraged Loans During and After the Crisis and the Role of the Shadow Banking System

In an article published in this journal in 1998, Nobel laureate Merton Miller argued that one of the best weapons available to national economies in their defense against the macroeconomic effects of banking crises is the availability of non‐bank financial institutions and products—or what we now refer to as the “shadow banking system.” Although Miller may have exaggerated the independence of bank‐ and market‐based sources of financing, the author argues that events during and after the recent crisis have shown Miller's claims about the importance of non‐bank investors in the provision of credit to be fundamentally correct. Critics of securitization and the shadow banking system tend to focus on the subprime mortgage story in which the sudden re‐pricing of credit risk and the resulting disappearance of investment demand for ABCP, private‐label mortgage‐related ABS, and ABS CDOs created unexpected and significant downward price pressure on those asset types. But the leveraged loan market tells a very different story. In contrast to the near complete disappearance of private mortgage securitizations, the extraordinary recovery of the U.S. syndicated leveraged loan market demonstrates that the relation between commercial and shadow banking has proved to be a highly productive and resilient one—and very much a two‐way street. When leveraged loans and CLOs experienced problems from 2007 through 2009 due primarily to the widespread liquidity and credit market disruptions that affected essentially all structured credit products, institutional investors in leveraged loans disappeared and the leveraged loan primary market imploded. But when institutional participants recognized the value of the underlying asset—corporate loans—and regained confidence in shadow‐banking products, leveraged lending by banks recovered quickly and dramatically. This outcome is viewed as vindicating Professor Miller's statement about the benefits of shadow markets and securitization— namely, the role of non‐bank investors in diversifying the risk of credit creation while at the same time improving the price discovery process in different markets. The recent history of the U.S. leveraged loan market demonstrates that shadow banking system participants play a critical role in meeting the total demand for such loans, and that the ebbs and flows from institutional leveraged loan markets are strongly connected with the health and integrity of the underlying leveraged bank loan market.     

证券型通证的海外实践与分析

证券型通证可以被界定为具有“通证”属性,且符合“证券”标准的资产。当前,理论和实践中关于证券型通证的应用方向、优势和风险存在诸多理论假设,尚需实践检验。本文选取了89个海外证券型通证进行分析,发现证券型通证目前主要应用于中小微企业,特别是金融科技相关企业的融资。相对传统证券,其优势在于减少发行和交易成本以及节约中介服务成本,在改善信息不对称问题上的优势并不突出。目前的主要风险在于守法风险、履约风险和监管套利风险,需要采取针对性措施。     

The Squam Lake Report: Fixing the Financial System*

In these excerpts from The Squam Lake Report, fifteen distinguished economists analyze where the global financial system failed, and how such failures might be prevented (or at least their damage better contained) in the future. Although there were many contributing factors to the crisis—including “agency” problems throughout the financial system and a bankruptcy code poorly suited for reorganizing financial firms—at the core of the problem is a potential conflict between the risk-taking proclivity of financial institutions and the interests of the economy at large that must be managed at least in part through more effective regulation. The Squam Lake Report provides a nonpartisan plan to transform the regulation of financial markets in ways designed to limit systemic risk while preserving—to the extent possible and prudent—the economies of scale and scope that justify the existence of today's large financial institutions. To reduce the risks that large banks will fail, the authors call for higher capital requirements based on more effective assessments of the risks of bank assets and liabilities, as well as a new systemic regulator that should be part of the central bank. To reduce the costs of failure when it occurs, the authors propose that banks be required to create “living wills” laying out their plan to sell assets or shut down operations in the event of financial trouble. As part of that plan, regulators are urged to “aggressively encourage” banks to issue “contingent” debt capital securities that convert into equity.     

Hedge Fund Involvement in Convertible Securities

Convertible arbitrage hedge funds combine long positions in convertible securities with short positions in the underlying stock. In effect, hedge funds use their knowledge of the borrowing and short‐sale market to hedge themselves while distributing equity exposure to a large number of well‐diversified investors through their short positions. The authors argue that many “would‐be” equity issuers that would otherwise pay high costs in a secondary equity issue choose instead to issue convertible debt to hedge funds that in turn distribute equity exposure to institutional investors. This allows companies to receive “equity‐like” financing today at lower cost than a secondary equity offering. The authors' findings also suggest that more convertibles will be privately placed with hedge funds when issuer and market conditions suggest that shorting costs will be lower.     

THE REVOLUTION IN CORPORATE RISK MANAGEMENT: A DECADE OF INNOVATIONS IN PROCESS AND PRODUCTS

The explosion of corporate risk management programs in the early 1990s was a hasty and ill‐conceived reaction by U.S. corporations to the great “derivatives disasters” of that period. Anxious to avoid the fate of Barings and Procter & Gamble, most top executives were more concerned about crisis management than risk management. Many companies quickly installed (often outrageously priced) value‐at‐risk (VaR) systems without paying much attention to how such systems fit their specific business requirements. Focused myopically on loss avoidance and technical risk measurement issues, the corporate risk management revolution of the '90s thus got underway in a disorganized, ad hoc fashion, producing a curious amalgam of policies and procedures with no clear link to the corporate mission of maximizing value. But as the risk management revolution unfolded over the last decade, the result has been the “convergence” of different risk management perspectives, processes, and products. The most visible sign of such convergence is a fairly recent development called “alternative risk transfer,” or ART. ART forms consist of the large and growing collection of new risk transfer and financing products now being offered by insurance and reinsurance companies. As just one example, a new class of security known as “contingent capital” gives a company the option over a specified period—say, the next five years—to issue new equity or debt at a pre‐negotiated price. And to hold down their cost, such “pre‐loss” financing options are typically designed to be “triggered” only when the firm is most likely to need an infusion of new capital to avoid underinvestment or financial distress. But underlying—and to a large extent driving—this convergence of insurance and capital markets is a more fundamental kind of convergence: the integration of risk management with corporate financing decisions. As first corporate finance theorists and now practitioners have come to realize, decisions about a company's optimal capital structure and the design of its securities cannot be made without first taking account of the firm's risks and its opportunities for managing them. Indeed, this article argues that a comprehensive, value‐maximizing approach to corporate finance must begin with a risk management strategy that incorporates the full range of available risk management products, including the new risk finance products as well as established risk transfer instruments like interest rate and currency derivatives. The challenge confronting today's CFO is to maximize firm value by choosing the mixture of securities and risk management products and solutions that gives the company access to capital at the lowest possible cost.     

The Financial Crisis: Causes and Lessons*

The author argues that the root cause of the recent crisis was a housing bubble whose origins can be traced to loose monetary policy and a government housing policy that continually pushed for lower lending standards to increase home ownership. The negative consequences of such policies were amplified when transmitted throughout the financial system by financial institutions through the process of securitization. In attempting to assess culpability for the crisis and identify possible reforms, the author focuses on three categories:

• 1 Defects in Financial Products: Without criticizing derivatives and the process of securitization, the author identifies the sheer complexity of the securities as a major source of the problem—for which the solution is a simpler security design combined with greater disclosure about the underlying assets being securitized.
• 2 Defects in Risk Management: Thanks in large part to agency and other incentive problems, there was universal underestimation of risks by mortgage originators and financial institutions throughout the securitization chain. Changing incentive pay structures is part of the solution, and so are better accounting rules for SPEs. But more effective regulatory oversight and ending “too big to fail” may well be the only way to curb excessive private risk-taking.
• 3 Defects in Government Policy and Regulation: While acknowledging the need for more effective oversight, the author argues that there was ample existing authority for U.S. regulators to have addressed these issues. Lack of power and authority to regulate was not at the heart of the problem—the real problem was lack of foresight and judgment about the unexpected. After expressing doubt that regulators can prevent major financial failures, the author recommends greater attention to devising better methods of resolving such failures when they occur. One of the main goals is to ensure that losses are borne not by taxpayers but by private investors in a way that maintains incentives for market discipline while limiting spillover costs to the entire system.

     

Pitfalls in Levering and Unlevering Beta and Cost of Capital Estimates in DCF Valuations1

The “levering” and “unlevering” of estimates of beta and various costs of capital are routine steps in estimating the discount rates used in DCF valuations. But as the authors demonstrate by reviewing the existing research on the subject, the levering and unlevering formulas that are most commonly used in practice are not appropriate for valuing many companies. They also illustrate the shortcomings of—and substantial valuation errors that can result from—the common practices of assuming that the betas of securities like debt and preferred stock are equal to zero and ignoring the effects of equity‐linked securities such as employee stock options, warrants, and convertible debt. The authors offer alternative levering formulas that are more appropriate for valuing most companies than—and as readily implemented as—the formulas commonly used today. They also provide a relatively easy way to estimate betas for debt and preferred stock that can be used in the levering and unlevering formulas. The authors discuss how properly to account for equity‐linked securities such as employee stock options, warrants, and convertible debt while demonstrating the potential importance of ignoring such equity‐linked securities in the levering and unlevering formulas. Finally, the authors show why it is appropriate to standardize the treatment of contractual obligations such as leases across comparable companies in order to get consistent estimates of the unlevered cost of capital.     

Options Arbitrage in Imperfect Markets

Option valuation models are based on an arbitrage strategy—hedging the option against the underlying asset and rebalancing continuously until expiration—that is only possible in a frictionless market. This paper simulates the impact of market imperfections and other problems with the “standard” arbitrage trade, including uncertain volatility, transactions costs, indivisibilities, and rebalancing only at discrete intervals. We find that, in an actual market such as that for stock index options, the standard arbitrage is exposed to such large risk and transactions costs that it can only establish very wide bounds on equilibrium options prices. This has important implications for price determination in options markets, as well as for testing of valuation models.     

The Capital Structure Puzzle: Another Look at the Evidence

Since the formulation of the Miller and Modigliani propositions over 60 years ago, financial economists have been debating whether there is such a thing as an optimal capital structure—a proportion of debt to equity that can be expected to maximize long‐run shareholder value. Some finance scholars have followed M&M in arguing that both capital structure and dividend policy are irrelevant in the sense of having no significant, predictable effects on corporate market values. Another school of thought holds that corporate financing choices reflect an attempt by corporate managers to balance the tax shields and disciplinary benefits of more debt against the costs of financial distress. Still another theory says that companies do not have capital structure targets, but instead follow a financial pecking order in which retained earnings are generally preferred to outside financing, and debt is preferred to equity when outside funding is required. In reviewing the evidence that has accumulated since M&M, the authors argue that taxes, bankruptcy and other contracting costs, and information costs all appear to play important roles in corporate financing decisions. While much, if not most, of the evidence is consistent with the idea that companies set target leverage ratios, there is also considerable support for the pecking order theory's contention that managements are willing to deviate widely from their targets for long periods of time. According to the authors, the key to reconciling the different theories—and thus to solving the capital structure puzzle—lies in achieving a better understanding of the relation between corporate financing stocks (that is, total amounts of debt and equity) and flows (which security to issue at a particular time). Even when companies have leverage targets, it can make sense to deviate from those targets depending on the costs associated with moving back toward the target. And as the authors argue in closing, a complete theory of capital structure must take account of these adjustment costs and how they affect expected deviations from the targets.     

CONVERTIBLE BONDS: MATCHING FINANCIAL AND REAL OPTIONS

For companies whose value consists in large part of “real options”‐ growth opportunities that may (or may not) materialize‐convertible bonds may offer the ideal financing vehicle because of the matching financial options built into the securities. This paper proposes that convertible debt can be a key element in a financing strategy that aims not only to fund current activities, but to give companies access to low‐cost capital if and when their real investment options turn out to be valuable. In this sense, convertibles can be seen as the most cost‐effective solution to a sequential financing problem‐how to fund not only today's activities, but also tomorrow's growth opportunities (some of them not yet even foreseeable). For companies with real options, the ability of convertibles to match capital inflows with corporate outlays adds value by minimizing two sets of costs: those associated with having too much (particularly equity) capital (known as “agency costs of free cash flow”) and those associated with having too little (“new issue” costs). The key to the cost‐effectiveness of convertibles in funding real options is the call provision. Provided the stock price is “in the money” (and the call protection period is over), the call gives managers the option to force conversion of the bonds into equity. If and when the company's investment opportunity materializes, exercise of the call feature gives the firm an infusion of new equity (while eliminating the debt service burden associated with the convertible) that enables it to carry out its new investment plan. Consistent with this argument, the author's recent study of the investment and financing activities of 289 companies around the time of convertible calls reports significant increases in capital expenditures starting in the year of the call and extending three years after. The companies also showed increased financing activity following the call, mainly new long‐term debt issues (many of them also convertibles) in the year of the call.     

贷款证券化、监管资本套利与资本监管改进

巴塞尔协议的资本充足率指标可以反映银行部门吸收风险损失的能力,但是无法监测和控制银行体系外的贷款总额和累积的信用风险。20世纪70年代的贷款证券化创新导致银行进行监管资本套利,并使得资本充足率监管趋于失效。本文基于贷款证券化下银行贷款余额与社会贷款余额的差异,分析银行监管资本套利的微观机制并提出改进资本监管的建议。     

Value Creation through Securitization: Evidence from the CMBS Market

Despite recent volatility and constraints in secondary market funding, analysts have ascribed substantial value creation to the securitization of commercial mortgages. Such value creation likely emanates from liquidity enhancements, regulatory arbitrage, price discrimination and risk diversification by pooling and tranching, gains from specialization in origination, servicing, and holding of mortgages, and the like. Indeed, such value creation would be consistent with past accelerated growth in the mortgage- and asset-based securities markets and the sizable profits earned by secondary market intermediaries. In this paper, we estimate the pricing effects of commercial mortgage securitization. We do so by applying loan level data from 1992–2003 to compare the pricing of conduit and portfolio loans held in CMBS structures. In contrast to portfolio loans, which are held for investment by originating institutions, conduit loans are originated for the sole purpose of sale and securitization in the secondary market. If securitization creates value, it should be evidenced in the relative pricing of conduit loans sold into CMBS pools and in a lower cost of capital to loan originators. We estimate a reduced-form model, in which the interest rate spread between commercial mortgages and comparable-maturity treasury securities varies with loan characteristics, capital market conditions, and conduit loan status. Estimation results indicate that securitization of conduit loans leads to an 11 basis points reduction in commercial mortgage interest rates. We assess robustness of results via hazard model tests for omitted variables and originator-specific effects. We further estimate a simultaneous equations model that accounts for the potential endogeneity of mortgage loan terms to the mortgage-treasury rate spread. Results of that analysis suggest a larger 20 basis points reduction in loan pricing among conduit loans sold into CMBS structures.     

The Capital Structure Puzzle: The Evidence Revisited

Since the formulation of the M&M propositions almost 50 years ago, financial economists have been debating whether there is such a thing as an optimal capital structure—a proportion of debt to equity that maximizes shareholder value. Some finance scholars have followed M&M in arguing that both capital structure and dividend policy are largely "irrelevant" in the sense that they have no significant, predictable effects on corporate market values. Another school of thought holds that corporate financing choices reflect an attempt by corporate managers to balance the tax shields and disciplinary benefits of greater debt against the costs of financial distress. Yet another theory says that companies do not have capital structure targets, but simply follow a financial "pecking order" in which retained earnings are preferred to outside financing, and debt is preferred to equity when outside funding is required.
In reviewing the evidence that has accumulated since M&M, the authors argue that taxes, bankruptcy (and other "contracting") costs, and information costs all appear to play an important role in corporate financing decisions. While much of the evidence is consistent with the argument that companies set target leverage ratios, there is also considerable support for the pecking order theory's contention that firms are willing to deviate widely from their targets for long periods of time. According to the authors, the key to reconciling the different theories—and thus to solving the capital structure puzzle—lies in achieving a better understanding of the relation between corporate financing stocks (the levels of debt and equity in relation to the target) and flows (or which security to issue at a particular time).     

试析资产证券化在我国的应用取向

从投资者的角度出发,资产证券化为投资者提供了一种优良的投资品种:资产支持证券,在投资者和融资者之间建立了一种新的资金融通渠道.开展资产证券化业务,必须遵循严谨的运作规范,如破产隔离、真实销售等.金融资产证券化具有广泛发展前景,但不良资产资产证券化,在我国当前的市场环境下,不宜规模化展开.     

Re‐equitizing Corporate Balance Sheets: Choosing Among the Alternatives

Companies are generally reluctant to issue new equity because it can be expensive capital. Among the largest costs of an equity offering are so‐called “market‐impact” costs. To the extent the typically negative market reaction to a stock offering causes an issue to be underpriced, such underpricing dilutes the value of current shareholders. Despite such costs, many companies—particularly financial institutions—are raising equity capital to “delever” balance sheets that have been squeezed by the credit crunch and economic slowdown. And far from transferring value from existing shareholders, these offerings can preserve and even increase the value of highly leveraged companies by shoring up their capital bases and providing the flexibility to get through a difficult period. According to recent studies, announcements of equity offerings by distressed companies have been accompanied by positive stock returns in excess of 5 %. The challenge for CFOs is to determine why and when issuing equity is the value‐maximizing strategy. The kinds of companies that are most likely to benefit from equity offerings are those that score low on credit metrics, have experienced cyclical declines in operating performance, and have growth opportunities as part of their recovery. There are a number of options for raising equity capital, but no set rules for identifying the optimal one. Nevertheless, the author offers a number of suggestions designed to help CFOs make smarter decisions: Communicate clearly to investors the intended uses of the proceeds from the equity offering and how they are expected to create value; Consider judicious cuts to the dividend to preserve capital; Involve current shareholders to minimize dilution, perhaps by considering a rights offering, and strengthen their commitment; Seek out “smart money” such as private equity or SWFs as long‐term investors; Get the offer size right the first time so a second offering can be avoided; and Monetize volatility in uncertain markets by issuing convertible securities.     

“走出去”对企业融资约束的影响——基于“一带一路”倡议准自然实验的证据

本文基于“一带一路”倡议这一准自然实验,使用双重差分法,以中国2007-2017年A股上市企业为样本,实证检验了“走出去”对企业融资约束的影响。研究发现,参与“一带一路”倡议的企业与未参与的企业相比,融资约束水平有所上升。该效应对处于重点对接省份的参与企业可能更为明显。与国有企业相比,参与“一带一路”倡议的私人企业的融资约束有所上升,而且处在重点对接行业和省份的参与“一带一路”倡议的民营企业融资约束更有可能上升。从机制上看,由于观察周期尚短和其它因素的限制,企业参与“一带一路”倡议以后,其在信贷资源获取、利润率和生产率等方面还未体现出优势来。从政策来讲,为更好地支持国家的“一带一路”倡议,需要进一步拓宽思路对企业形成更有效的金融支持,以提高“一带一路”建设的可持续性。