Saturday, September 25, 2010

A Primer on Corporate Bonds – III (Other Risks): Million Dollar Journey

A Primer on Corporate Bonds – III (Other Risks): Million Dollar Journey

Posted: 22 Sep 2010 04:30 AM PDT
This is a guest column by regular contributor Clark.
The last article on corporate bonds looked at corporate credit ratings/risk and Part IV dealt with some metrics to remember when purchasing individual bonds. In this part, we'll look at other risks and touch upon the issue of corporate governance.

Other Risks

Government bonds protect an investor from credit risk, since it is relatively uncommon for countries to go bankrupt when compared to corporations. Corporations offset the additional risk borne by an investor, when holding corporate bonds, by providing better yields than government bonds. Apart from the risk of default and credit risk, there are other risks that an investor would need to be aware of.
  1. Liquidity Risk. In the case of individual bonds, there may not be a buyer available when needed, thereby giving grief to the bondholder. Also, the bid-ask spread may be higher than bond ETFs.
  2. Call Risk. Certain corporate bonds are issued as callable; these bonds give a company the right to pay off their debt (repurchase the bond) earlier than the maturity date but after a minimum time period. Companies may compensate for this right by offering a higher yield than conventional corporate bonds. Why would a company repurchase their bond? In a market where interest rates have dropped, they would call their bond and re-issue new ones at prevailing lower interest rates. It is a case of taking advantage of market fluctuations and issuing callable bonds gives them the authority to do so.
  3. Event Risk. As may be evident from the name, any event such as natural disaster, political instability or change in securities regulations may affect corporate bonds. If such an event triggers an adverse impact to the industrial sector of the corporation, then the ratings agencies may downgrade the company's credit rating. It is not necessary that all companies that have issued bonds in the sector will face the brunt, since some companies may be more financially leveraged than the others. Hence, the individual liability of the business plays a big part in determining the result of the event.
  4. Supply Risk. If several bond issues similar to the current one are floated, then the basic supply vs. demand factor may cause a drop in prices.

Corporate Governance Ratings

No matter how good the balance sheet of a corporation, it wouldn't take long for a poor management team to push the company to the edge of the precipice. Stories of companies going bankrupt due to management malpractices are well-known. To counter such adverse results, corporate governance ratings are published. Company board members may or may not hold these ratings in high regard but they cannot disregard the impact of poor governance ratings.
Consistent poor ratings convey to investors that the management is not doing a reasonable job and the board does not want to take action to change the status quo. Prolonged failure to deal with such situations may affect the quality of directors on board, since the good ones may leave if they find too many from the "we don't care" camp and cannot enforce the right measures. Also, in their own self-interest, they will not want to be associated with such companies since it would reflect poorly on their personal credentials and future prospects.
Although the issue of corporate governance is important, there seems to be an apparent lack of validity to the ratings issued by the different services as discussed by this study. If you are interested in knowing more about these ratings, check out these Risk Metrics, Standard & Poor's and Corporate Library pages for more and better details.
As seen from this three-part series on corporate bonds, there are several factors to be considered before buying an individual bond issue. The presence of credit rating agencies eases the selection process by narrowing the list of companies. Yet, there are other risk factors that need to be considered before becoming an individual bond investor. For investors who lack the time, interest or skill to research bonds, it would be wise to buy a bond fund or bond ETF. They could even go for a higher-yield security, where a few defaults will not entail significant principal loss because of the diversification.
About the Author: Clark is a twenty-something Saskatchewan resident employed in the manufacturing sector. He repaid around $20,000 in student loans and has been working to build his investment portfolio as a DIY investor (not trader) while nurturing plans to retire early. He loves reading (and using the lessons learned) about personal finance, technology and minimalism.
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Normal is Broke

Living With A Chain

How to Get a Job when No One is Hiring

When the jobs are hidden

To get a job, you have to find the openings that no one's advertising, and really impress your potential employer.

By Jia Lynn Yang, writer-reporter

NEW YORK (Fortune) -- David Perry, a longtime headhunter, says you're wasting your time if you're looking for job postings online. And he should know: he's often the guy on the other side helping companies lure new talent. Perry, who's based in Ottawa, says that in the last 22 years he has accomplished 996 searches totaling $172 million in salary. And the bottom line in today's economy, he says, is you have to tap the "hidden job market."

Perry's also the co-author of "Guerrilla Marketing for Job Hunters" and he recently spoke with Fortune.

What's the "hidden job market"?

When companies say, 'We have a hiring freeze,' that doesn't mean they're not hiring. It just means they're not adding headcount. Every year there's 20-25% turn over. So in a 1,000-person company, 200 or 250 people are going to turn over, either through attrition, or someone moves. Those companies are still hiring but they don't want to tell you.

So how do you find these jobs?

What you have to do in a recession is map your skills to employers to where you know they have a problem you can solve. My advice to job hunters is pick 10 to 20 companies, no more, and pick companies you're interested in, and that you think you can add value to. That requires researching companies, and so that list may take you two weeks. If you're trying to crack the hidden job market and you know the job position you want reports to vice president, find that vice president on LinkedIn and look at his profile to see who else he's connected to and go ask them, 'What's this guy like to work for?' Do the research before you even pick up the phone.

How can you get someone's attention?

We can go into billboards, sandwiches - that stuff only works once. It's only for one person who figures it out once, once in a city. If you're looking for fun stuff, we have this thing called the coffee cup caper, 30% of the time it will result in an interview. You send an employer a coffee cup with a little $5 swipe card with a little note that says, I'd like to get together and talk with you over coffee. I'll be calling soon. And you send it by U.S. post two day delivery, and that gets registered. So when they've signed for it, you wait about 20 minutes and then you call them. And then you go, Hi, I know you just got my package.' You're proving you're imaginative and creative.

What something people should avoid during a job interview?

This drives me insane: I've seen people mentally deciding in the interview whether they want the job. That's the last place to decide. You go into an interview, and you sell like your life depends on it. You've got to get the job first. I've seen it thousands of times. There's this point in the interview, where people go 'Hmm, do I really want this? You can see their body change. The employer picks it up and it's gone. If the employer is telling you, 'I love you,' and you're not saying 'I love you too,' it's over with.

How about following up afterwards?

If you really like the opportunity, don't go home and write thank you very much. Go back and write a letter that says, upon further reflection of what we were talking about, here's what I bring to the table, here's how I see myself fitting into the organization, including a 30-60-90 day plan.

How can someone attract a recruiter's attention?

You have to go to ZoomInfo and LinkedIn and create a profile. All corporate recruiters and probably 20% of the headhunters in America have ZoomInfo accounts. When we start a search, companies aren't going to advertise. The headhunter goes to ZoomInfo, types in requirements that we need, like skillset, degree, city, functional title, and up will come anywhere from a hundred to several thousand people who fit that criteria. Then we go to LinkedIn and run the same search. If you're in ZoomInfo with a picture, we're going to call you first. Just reverse engineer what recruiters are doing so you get found.

How can you really impress a potential employer?

It hasn't worked in years just to bring in your resume, except only in the most junior positions. I concentrate on directors to CEOs, and the last interview for us regardless is always a Power Point presentation of what you've learned, pain points, and how you intend to fix that. Everyone talks about being a great leader and great communicator, so prove it. Don't go into an interview and treat it like it's just another business meeting. Your career is your biggest asset now - because it's certainly not your house. To top of page


August 2008 Dave Ramsey on Barack Obama

This was aired in August 2008. So was Dave right???