China Cracks Down on IPOs

The IPO market has been hot this year, with more than 200 offerings raising over $70 billion. Of these IPOs, 30 were Chines companies, making 248 U.S. exchange listed China-based companies totaling $2.1 trillion in market value. Now, new rules by the Chinese government may slow Chinese domiciled companies listing on U.S. exchanges. The Chinese State Council stated that it would update the rules for "the overseas listing system for domestic enterprises"and tighten restrictions on cross-border data flows and security. China has already launched an investigation into ride-hailing app Didi. And Nasdaq-listed Weibo has announced plans to go private. 

Bond Ratings Jump

In early 2020, COVID-19 lockdowns slowed the economy and resulted in a record dollar amount of debt being downgraded. By the end of the year, the default rate on corporate bond reached 6.8 percent. Now, with the economy recovering, corporations are becoming healthy and a record $127.9 billion worth of debt was upgraded in May 2021. In early June, a record $340 billion had been upgraded over the previous 10 weeks. And in even better news, Moody's projects the default rate will fall percent to 1.7 percent by December.  

Real-Time Payments

Many of you are probably familiar with near instantaneous money transfers using Venmo or Paypal. And while we discussed next-day ACH transactions in the textbook, in 2017, an interbank payment system was unveiled, the real-time payment (RTP) network. While only 130 banks out of the more than 9,600 financial institutions in the U.S. have adopted the system, these adopting banks cover 60 percent of demand deposit checking and savings accounts. Several challenges have prevented the adoption of the RTP system. For example, businesses do not seem to be concerned about speeding up payments by one day, especially in the current low interest rate environment. The biggest hurdle appears to be infrastructure, but expect this hurdle to be reduced when Jack Henry & Associates and Fiserv come online later this year. But the RTP system does provide other perks, including 24/7/365 access, instant confirmation, and settlement finality, meaning the sending bank can't revoke or recall a payment. 

Green Bonds?

During 2020, a record $270 billion in green bonds were issued, and green bond issuance is on pace to surpass that record this year. And while we discussed covenants and the ability of bondholders to undertake legal action against the bond issuer for violating these covenants, as a recent article in the Wall Street Journal highlights, green bond investors have little to no recourse if the bond issuer does not use the bond proceeds for green projects. Even the definition of a green bond is somewhat nebulous. For example, Luxembourg packaging manufacturer Ardagh issued $2.8 billion of green bonds to fund the partial merger of its metal can unit. The green component of the bond? Ardagh committed to using an equivalent amount of the bond issue to purchase more recycled materials and increase energy efficiency. The bond was certified green by a leading independent agency.

Basketball TVM

Former NBA star Allen Iverson signed an endorsement contract with Reebok back in 2001. One of the terms of the contract was that Iverson would receive $800,000 per year for the rest of his life, plus a trust fund of $32 million on his 55th birthday on June 7, 2030. As an article about the agreement explains, Iverson may have received the worst of the deal, but we do have several problems with the analysis in the article. First, it is unlikely that Reebok would have offered Iverson $32 million in 2001 or $32 million on 2030. Reebok funded the trust with less than $32 million in 2001 with the intent that it would be worth $32 million in 2030. The second issue is a time value of money issue. The article notes that if Iverson had invested $32 million in 2001 at 5 percent, it would be worth $87 million in 2030. Check this for yourself and see if you don't agree that the future value of $32 million for 29 years at 5 percent is about $131.7 million

Shrinkflation

You have heard of inflation, deflation, and stagflation. Recently, you may have noticed shrinkflation. Due to rising costs of raw materials and labor, producers have begun to shrink package sizes. For example, ice cream maker Tillamook announced that it was shrinking the size of its cartons from 56 oz to 48 oz, a 14 percent shrinkage. Since consumers tend to look at price rather than package size, the move is intended to keep sales constant. Of course, shrinkflation is really inflation in another guise. In fact, the United Nations FAO Food Price Index make its biggest leap since October 2010, and reached its highest level since September 2011. Shrinkflation is not a new phenomenon, but it is an indication of rising inflation. 

LIBOR End Is Near

The Financial Stability Board (FSB), which coordinates financial rules for G20 countries, outlined its new transition polices to move away from LIBOR by the end of 2021. A number of U.S. dollar LIBOR rates will be available until the end of June 2023, but can only be used for legacy contracts. The FSB is encouraging the use of overnight risk-free rates, which include SOFR in the United States and SONIA in Great Britain.