What is Asset Backed Risk?

Asset Backed Risk:

An asset backed risk (ABS) is a fixed income instrument structured as a securitized interest in a pool of assets. In general term,  assets backed securities are understood  to be  securitisation of auto loans, credit card receivables, home equity loans and student loans.

ABS carries the CREDIT RISK. Diversification of underlying assets, credit enhancements or trenching can mitigate this. ABS can be subject to prepayment risk. Consumer are more likely to refinance a home than an auto in response to a drop in interest rate

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ABS are appealing to issuers because the structure allows them to get assets off their balance sheets, freeing up capital for further receivables. However, Sarfaesi Act, 2002 Act (The Securitisation and Reconstruction of Financial Assets and Enforcement of  Security Interest Act, Sarfaesi Act, 2002) is requires issuers of all securitisation to retain some of the credit risk of those instruments.  Assets backed securities do make it possible for issuers whose unsecured debt is below investment grade to sell investment debt.

To create an asset backed security, a corporation creates a special purpose vehicle to which it sells the assets. While it is common to speak of the corporation as the issuer of the asset backed security, it is legally the trust of special purpose vehicle that is the issue. It is the trust or the special purpose vehicle that sells securities to investors.

To protect investor from possible bankruptcy of the corporation, there are three legal safeguards:
1) Investor receive a perfected interest in the assets’ cash flows.

2) Transfer of assets from the corporation is a non-recourse, true sale.

3) A non-consolidation legal opinion is obtained certifying that asets of the trust or special pupose vehicle cannot be consolidated with the corporation’s assets in the event of bankruptcy.

These same safeguards allow the corporation to remove the assets from its balance sheet. The corporation generally continues to service the assets collecting interest and principal payment, pursuing cash flow for providing these ongoing services. For investors, assets backed securities are an altenative to highly rated corporate debt. They generally offer similar or superior liquidity. Because the underlying assets are diversified, they are less subject ot credit surprises.  ABS can be structured into different classes or trenches, much like Collateralized Mortgage Obligation (CMOs). They may be structured with different average maturities. Choice of structure depends upon investor demand as well as the nature of the underlying assets.

Key Financial Indicator for Operation Analysis

Operational Analysis is a method to examine the current and historical performance of operation. It is very creative in nature and should trigger consideration of how the objectives could be better met, how cost should be saved, and even the organization be performing a PARTICULAR Function.

      Operation Analysis must answer the some question from specific areas of
·         Strategic and business results
·         Financial Performance
·         Market and industry trends
·         Customer Results
·         Innovation

There are some Financial Indicator which helps like a boon in Operation Analysis viz;

Working Capital	Is the difference of Current assets and Current liabilities
Accounts Receivables Days	The time period within which the Receivables converts into cash
Accounts Payable Days	The time period within which the payables are setoff
Inventory Days	The average no. of days a firm hold its inventory.
Operating Cash Flow	Net cash flow from Operation
Operating Cycle	The average no. of days a firm need to collect the cash it used to purchase inventory.
Operating Cash Flow Margin	Is the difference between the revenue of the firm and the Operating cash  flow.
Return On Equity	Net profit per Equity
Labor cost ratio ( employee to sale ratio)	Cost incurred per employee
Sales per employee	Sales generated per employee
Fixed Asset turnover ratio	Fixed assets to sales
Debt to equity ratio	Long term Debt to Equity (shareholder’s fund)
Cash Flow leverage	Debt to EBITDA.
Cash Flow Coverage	The operating cash flow used to generate business funded.
Return On assets	Ratio of Net Income to Total Avg. Assets
Asset Composition	Percentage of each class of assets to Total assets

Calculate Your EMI Yourself

I was calcuating EMI for my loan through the formulae in the text and I found it very cumbersome.
 
EMI, we all know, Equal Monthly Installment. To know your emi before taking the loan is very important. From now onwards you don't have to go to bank or your financial agent to get it calculated. You can calculate your emi and plan your investment accoriding to your convinience.
 
The only thing you should know before calculating is the Interest rate, the bank or financing agency will charge you. After that you are all set to calculate your emi.
 
PMT function is one among many you can use to calcuate your emi.
 
Open the HOLY MS-Excel
 
Punch down the amount of Loan you want to take, the rate of interest the financial institution will charge you, and the period of emi you want to make, that's it.
 
=PMT(rate,nper,pv,fv,[type])
 
Now lets us understand the formula.
 

Rate- Rate of interest, you have to divide the rate of interest 12, 2 for monthly installment and semi    annually installment respectively. 

nper - No. of emi
Pv-  Value of Loan
Fv- Optional, it the the value of at the end of the period you would get.
type- There are two option 0 or 9. EMI Payable at the beginning of period (0), EMI Payable at the end of period (1)  

Please see the exhibit below for your reference.

 

 

This formulae can also be used to calculate the Final amount for your Recurring Deposit and various investment tools.

Keep Reading Keep Knowing.


Please reply with your valuable comments.




 

Dear Readers,
I want to share my experience of interview with CRISIL Ltd, Standard & Poor Co. in Gurgaon.
CRISIL is India's largest and world's fourth largest rating agency. In India, 2 out of 3 companies are rated by CRISIL.

The first round is the Aptitude test and the second round of interview is HR round, most probably you will get the call after 2-3 days of your aptitude test.
Interview with this big player was not like a bread and butter.
The main hurdle was the Aptitute Test.
Aptitude test comprise of 5 section
1) General Finance Section
2) Reasoning Section
3) General Awareness
4) Financial Statement Risk Analysis
5) Essay Writing.

General Finance Section comprises the objective question hard core rlated to finance and analytics tools and some banking and finance question. viz,
Tandon Committee.
Operating and Non Operating income/expense,
Company having identical business in same market, but one is adopting the SLM of Depreciation and other is WDV method of Depreciation, which company will make highe profit?
Some ideal ratios value, etc.

In Reasoning section, there was general reasoning question which are too easy to solve.

In general awareness section, the question which is very important is the current CEO Of CRISIL Ltd. You get this question very often in the aptitude test. Apart from that, there are not any question that a general person don't know.

Now in the Financial Statement Risk Analysis, you will be given the financial statement to find the required Risk in that.
You can do it very simply, but the thing that you have to look after is the significant change in the given heads. And when you find that, analyse the scenario that happens if the condition persists.
Like decreasing Interest Coverage Ratio, No ideal Current Ratio, Negative cash flow, low eps and many more.

And last but not the least, the essay writing section. This section fully depends on your intellectuality and the way you express your thoughts regarding the topic that you have selected. But for your information, keep yourself updated with the current economic and social affairs and you are done :)...!!!!

Thanks for reading.

Please reply with your valuable comments...

 

SLOPE 

In order to calculate beta, we need historical data for the benchmark index and historical data for the same period for the instrument for which we are trying to calculate the beta. Once the data is retrieved, we need to calculate the percentage change from one period to another.
If we are using weekly data we need to calculate the percentage change from one week to another of the benchmark index and the instrument for which we are trying to calculate the beta.

• the array of dependent variable (weekly percentage change of the instrument)
• the array of independent variable (weekly percentage change of the benchmark index)

=slope(the array of dependent variable, the array of independent variable

To calculate the the percentage change form one period to another of the benchmark and the instrument, we need to do the following calculation


Suppose we are calculating the beta on monthly basis
% change from one period to another=(Closing value month1-closing value month2)/Closing value month1


 Lets see and exhibit here (hypothetical figure)

Thanks for reading.

ECONOMIES OF SCALE

E

conomies of scale are the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are diversified over more units of output.

Economies of scale apply to a variety of organizational and business situations and at various levels, such as a business or manufacturing unit, plant or an entire enterprise. For example, a large manufacturing facility would be expected to have a lower cost per unit of output than a smaller facility, all other factors being equal, while a company with many facilities should have a cost advantage over a competitor with fewer.

Often operational efficiency is also greater with increasing scale, leading to lower variable cost as well.

As far as I have concern, I think to achieve highest economies of scale, you need to produce beyond the breakeven point & up to the point where cost of production of each unit of goods increases.

At breakeven point, you’re at balance no gain no loss, But achieving highest economy of scale means a point after which the each unit of production cost you more.

It may be due to the highest capacity utilization of the  production plant.

In other context, to get highest economy of scale from the same production plant, you need to get it in well working condition.

The simple meaning of Economies of scale means to increase the efficiency of operation by cost wise and volume wise, area wise, service wise.

The area of economies of scales are

a.       Lower Input Cost:-  When an entrepreneur buys input in bulk, but maximum limit. In case, if you don’t have the facility to store the excess input, it will get wasted and you have to do a lots of calculation to achieve ES.

b.      Costly Inputs:- Some inputs such as R & D, skilled labor, managerial expertise are expensive but because of the possibility of increase in efficiency with such inputs, they can lead to decreased the  cost of production of each goods sold apart from that R & D work and advertisement may discover new market for the outputs.

c.       Specialized Inputs:- As the production scale increases, company can afford for specialized inputs to increase the efficiency.

d.      Techniques and organizational inputs:- Clear cut chain of command, better logistics tracking techniques, improving techniques for production and distribution on the other hand organizing the input collection center, improved availability of outputs.

e.       Learning Inputs:- As above, the learning process should never be stopped. Learning process in related to production, selling & distribution, promotion, market research increases the efficiency as well as valuation of the enterprise.

Internal and External Economies of Scale

Alfred Marshall made a distinction between internal and external economies of scale. When a company reduces costs and increases production, internal economies of scale have been achieved. External economies of scale occur outside of a firm, within an industry. Thus, when an industry's scope of operations expands due to, for example, the creation of a better transportation network, resulting in a subsequent decrease in cost for a company working within that industry, external economies of scale are said to have been achieved. With external ES, all firms within the industry will benefit.

From the above, we come to point that, when we examine or research for the economies of scale, ultimately we have scale both the external and internal economy.

BUT Diseconomies also occur…..

It is just a  reverse scenario. They stem from inefficient managerial skill, inefficient labor and input management, over hiring or deteriorating transporation network. In simple word, jeopardizing the whole chain, whole network. Let us elaborate this, expanding the business will ultimately expands the complexity of business. You have to be at everybody’s reach. But in the process of expanding, small enterprises are not able to handle the big dogs in the race, and their own function are not handled properly.

Conclusion

The key to understanding Economies of scale (ES) and Diseconomies of Scale (DS) is that the sources vary. A company needs to determine the net effect of its decisions affecting its efficiency, and not just focus on one particular source. Thus, while a decision to increase its scale of operations may result in decreasing the average cost of inputs (volume discounts), it could also give rise to diseconomies of scale if its subsequently widened distribution network is inefficient because not enough transport trucks were invested in as well. Thus, when making a strategic decision to expand, companies need to balance the effects of different sources of ES and DS so that the average cost of all decisions made is lower, resulting in greater efficiency all around.

Thanks for Reading, Please reply with your valuable comments.

 

Highlights of S&P Outlook India.

S&P raised the outlook for India’s “BBB-Minus” to “stable” from “negative”.

While talking briefly about India’s current scenario, I can just say that, for India it is a transition period.
There is a full-fledged majority of single party ruling over Indian Constituency.  Apart from that, PM Modi has swayed all over.
In this transition period, people are seeing the changes, till date most of the changes are positive. And here, the S&P outlook for India has improved the persona of governance under NaMo.

Here I have tried to find some of the reason of changes in the outlook for India’s rating by S&P.

·         India’s improved political setting offers a conducive environment for reforms which may boost growth prospects and improve fiscal management,

·         Country’s strong external profile, combined with its democratic institution and free press.

·         India’s little external debt

·         View that the new government has both the willingness and capacity to implement reforms necessary to restore some of India’s lost growth potential.

·         S&P may lower the rating if the government’s structural reform agenda stalls such that economic growth does not accelerate or fiscal and debt ratios fail to improve.

·         India’s well-entrenched democratic political system is another credit support.

While reviewing the rating by S&P, it is found that the conducive environment created by the governance had made this upgrade in the rating. India’s low wealth level, as measured by per capita GDP, is one of the main constraints on the upgraded rating.

Let us understand the constraints on which rating agencies award grades and what actually the Credit Rating is!!!!

Credit Ratings are opinions about Credit Risk, ability and willingness of the issuer (corporation or state or city or govt) to meet its financial obligations in full and on time.

Each Agencies applies its own methodology in measuring creditworthiness and uses a specific rating scale to publish rating opinions (we are not going to discuss those  methodologies here). Typically, ratings are expressed as letter grades that range, for example, from ‘AAA’ to ‘D’ to communicate the agency.

Investment Grade. AAA:-  Extremely strong capacity to meet financial         commitments. High Rating. AA  :-    Very strong capacity to meet financial commitments. A     :-   Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances. BBB  :- Adequate capacity to meet financial commitments, but more subject adverse economic conditions. BBB-  :- BBB minus opines considerable lowest investment grade by market participants.   Speculative Grade BB+ :- Considered highest speculative grade by market participants. BB :-  Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions. B   :-  More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments. CCC :- Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments. CC  :- Highly vulnerable; default has not yet occurred, but is expected to be a virtual certainty. C     :-Currently highly vulnerable to non-payment, and ultimate recovery is expected to be lower than that of higher rated obligations. D       :-Payment default on a financial commitment or breach of a imputed promise; also used when a bankruptcy petitions has been filed or similar action taken.      Courtesy: SPRS Understanding Rating

 

When we talk about India’s current Rating, it has been upgraded From BBB Negative to stable (not positive). It means that the current scenario of Indian economy is at upward move. There are hopes of reforms in the economy. The stable outlook for the next 24 months reflects a view that the new government has both the willingness and capacity to implement reforms necessary to restore some of India's lost growth potential, consolidate its fiscal accounts, and permit the Reserve Bank of India to carry out effective monetary policy. S&P could raise the rating if the economy reverts to a real per capita GDP trend growth of 5.5% per year and fiscal, external, or inflation metrics improve. Conversely, S&P may lower the rating if the government's structural reform agenda stalls such that economic growth does not accelerate, or fiscal and debt ratios fail to improve.