Debt Restructuring Shifts Power from Dubai World's Management

Written by Chris Titus, CFA

Language: English (business)

Level: Intermediate and above

Vocabulary - How many phrases can you create with ‘debt' using the words below?

counseling ∙ management ∙ management ∙ restructuring ∙ service ∙ relief ∙ consolidation ∙ laden

• debt restructuring - the process by which a company adjusts the terms of its outstanding debt (maturity, interest rates, terms & covenants)
• debt consolidation - taking many debts and combining them into one
• debt counseling - providing advice to individuals and businesses on managing their debt.
• debt management - the process by which a company manages its outstanding debt.
• debt service - the act of paying interest on debt. "Company XYZ services its debt every six months."
• debt relief - when debt is forgiven or deferred, typically in bankruptcy court.
• indebted - to have debt or obligation to someone or an entity. This can be used to mean non-financial obligations.
• debt-laden - to have a lot of debt.

Article Excerpt

The debt-laden city-state of Dubai announced it would restructure the debt of its largest corporate entity, Dubai World. The conglomerate includes significant investments in real-estate and ports. The announcement also stated that Deloitte LLP would lead the restructuring effort, providing debt management counseling to Dubai World.

The Financial Support Fund, a government fund set up to manage Dubai's debt, is evaluating the extent of restructuring required. Officials plan to ask lenders to defer World Dubai's debt service requirements until May 30. The temporary debt relief will allow officials time to develop an appropriate debt restructuring plan.  It is also expected that such a plan will shift power from Dubai World's management to the government.

Due to the recent real-estate market crash, the company urgently needs to defer its $3.65 billion real-estate bond that will come due next month.

Questions

• Who or what is Dubai World?
• What has the government of Dubai announced they are doing?
• How is Deloitte LLP going to help?
• Why does Dubai World need debt relief?
• How much debt does Dubai World need to immediately restructure?

Activity

You are the senior manager at Deloitte LLP working on the Dubai World debt restructuring project.

A) What things should you consider when developing an appropriate debt restructuring plan? 

• You should consider Dubai World's source of income, the consistency/reliability of that income, the company's expenses, amount of debt, and value of the assets.

B) Make some recommendation the company should consider.

• Suggestions may include: assets they could sell, finance, or refinance, expenses they may seek to reduce, and other revenue sources not being exploited.

View My Other Lessons

One in Four Homeowners Is Underwater

Written by Chris Titus, CFA

Language: English (business)
Level: Intermediate and above

Vocabulary:

• Underwater - when a borrower owes more than the home is worth because the home fell in value.
• Home equity = (Home Value minus Home Loan)
• ‘hardest hit' - experiencing the worst of something
• ‘the second shoe to drop' - means more bad news will come making the current situation worse.
• to land - to fall onto
• to saturate - cannot hold anymore. Image: a sponge full of water. The sponge is saturated.
• bloated - at or beyond capacity
• Leverage - Purchase something with debt. You own more assets working for or against you. Leverage can be very good or very bad...very quickly!
• ‘to bottom out' - to reach a bottom and move sideways.

Warm Up Questions:

• Has housing been a good investment over the long-term? Why?
• Is now a good time to buy into housing? Why?
• If you could buy a home today, where would you buy it and what kind of home would you buy?

Article

The amount of U.S. homeowners underwater has risen to 23%, jeopardizing the outlook for a sustained recovery in housing.  According to First American CoreLogic, a real-estate information company based in Santa Ana, CA, roughly 10.7 million households had negative home equity balances in the third quarter. The hardest hit states were Nevada, Arizona, and Florida. Underwater mortgages as a percentage of total mortgages ranged between 45% and 65%.  The high proportion of underwater mortgages is likely to be the second shoe to drop in the financial crisis. Many of these mortgages will land in bank foreclosure and the homes will further saturate an already bloated housing market. Economists don't expect U.S. home prices to bottom out until early 2011 due to a saturated market.

Questions:

• Why is the housing recovery in jeopardy?
• Why is having a mortgage that is underwater a bad thing?
• Which were the hardest hit states? Do you think the amount of borrowers underwater was very high? 
• Valuation is often a relative measure. What should the proportion of underwater borrowers be in a healthy market? Take a guess and explain your rationale. 
• What was the first shoe to drop? Describe the second shoe to drop. Will the second shoe have more of an impact than the first, or just delay a recovery? 
• If you live in Massachusetts, how much of an impact will you feel by a second round of real estate foreclosures in Nevada, Arizona, or Florida?

Activity

You are an investor who believes a second shoe is about to drop. How can you take advantage of this situation? Name different ways you could you profit. Name different ways you could protect your current investments.

Possible Answers:

• Cash: Have cash ready to make purchases after prices fall again. However, it would be best to wait until the market has bottomed out and begins rising again.
• Knowledge: Become familiar with the geographic areas that have high proportions of underwater borrowers. Learn whether your area will suffer the same problems. 
• Protect: Sell any properties ahead of the next fall in prices
• Rental Properties: Lock tenants into longer-term leases (at lower prices if necessary)
• Derivatives: Purchase credit default swaps that bet mortgages fail. This is for more sophisticated investors - typically institutional investors. Yes, these are the securities that got us into this financial mess.

View My Other Lessons

AmEx's Online Credit Card Processing Revolution

Written by Chris Titus, CFA

Language: English (business)

Level: Intermediate and above

Vocabulary

• online credit card processing
• cutting edge technology
• reloadable
• social media
• slashed
• entrenched

Warm Up Question:

• When you take a trip with miles you've accumulated, how does your credit card company pay for the miles they award you?
• How does your credit card company earn money? We will read about one revenue channel.
• Do you feel more comfortable paying over the Internet if you see a Visa or American Express logo on the merchant's page?

Article

American Express (commonly referred to as "AmEx") announces the acquisition of Revolution Money, an Internet-transaction company, for $300 million. The deal provides AmEx with a reloadable, prepaid product technology that can compete with alternative online credit card processing services designed for social media sites. The company also plans to develop mobile credit card processing solutions in the U.S.

"New payment products and platforms are evolving rapidly and it's important for us to keep identifying cutting edge technologies," said AmEx Chairman and Chief Executive Kenneth I. Chenault.

Credit card processing fees, the amount a merchant pays per transaction for accepting credit cards, has long been a source of tension between merchants and credit card processors. To compete with larger, more entrenched companies, Revolution Money slashed its credit card processing fees by up to 75% for merchants.

Questions

• How often do you use your credit/debit card?
• Do you ever use it online? If not, why?
• Why is AmEx making this acquisition?
  Acquiring a cutting edge technology that will expand their business and keep customers making all their purchases (plastic, online, mobile) through the AmEx system, for which they earn a fee on each transaction.
• So, how do credit card companies earn their money?
• Is this expense hidden from the consumer?
  Yes
• How much is AmEx paying for Revolution?
  $300 million
• What do they offer AmEx?
  The ability to retain customers and earn more from their transactions in new media channels
• Can you name a few social media websites?
  Facebook and LingoPass! are examples
• Can you name a few credit card processors?
  Think of the logos you see in stores:
  Visa, MasterCard, Discover, AmEx
• How has Revolution Media competed with these companies? 
  Better service, price, technology, etc.? Price and technology

Activity

You are the CEO of PayPal, a global online credit card processing service that is owned by EBay. For years, your company has operated in a niche industry with little competition. You hear about AmEx's acquisition and realize that a much larger company is going to begin competing directly with you.

• Make a list of three possible actions you could take to protect your business?
  Examples include acquiring new technologies, slashing prices, promotions, etc.
• Before you select one, tell us the pros and cons for each
  For example: How will slashing prices affect your long-term profitability and ability to compete?
• After you select one solution, describe it.
  For example: If it is a promotion, maybe create an advertisement or describe the terms of the promotion. If it is a new technology, what does it do and why is it better than the current technology.
• Lastly, tell us three things you need to consider when implementing the solution
  For example: Will a new technology be disruptive for your current clients?

View My Other Lessons

Business English: Day Traders Create Commodities Bubble in a Post Crisis Environment

Written by Chris Titus, CFA

Language: English (business)

Level: Intermediate and above

Warm Up Discussion:

• Read the headline above and describe what is happening.  
• Can you guess why a bubble is forming while we are in the middle of a global recession?

Vocabulary (Dictionary: Merriam-Webster)

• day trading - often buying and selling shares of a stock within the same day
• commodities - a product of agriculture or mining (grains, metals, etc.)
• spike - to rise very quickly, almost instantaneously
• overheating - to grow too quickly, creating inflation or an abnormal rise in prices
• cite - to use as support in an argument
• resurgence - renewed growth or interest in something
• sophisticated - complex or having a high level of knowledge
• scarce - not many, not plentiful

Article

Chicago, IL - Nov 16 - Despite a weak economic outlook, the recent spike in commodity prices would lead you to believe that the global economy is overheating. Prices for many commodities are back to pre-crisis levels. Many analysts cite an increasingly volatile U.S. dollar. However, a recent report suggests that a resurgence in day trading activity has given fuel to this rebound. Individual investors have been enrolling to day trading courses to learn the art of day trading. Some trade online from work, while others have left their job to day trade for a living.

Most day traders begin by learning how to day trade stocks. In recent years, individual investors have moved into day trading commodities because there is less risk of corporate fraud, a problem in recent years.  The skills required for day trading commodities are the same as those needed for day trading stocks - technical analysis. Using technical analysis, the trader develops a psychological profile of a stock or commodity by observing its price and volume patterns. As more sophisticated investors have entered the market, trading profits have become scarce with the wild swings in the market. Many investors have lost all of their saving, prompting the government to take action.

Questions

• If you play the stock market, do you prefer day trading or long-term investing?
• If you trade/invest in stocks, how do you decide which stocks to purchase?
  If not, how would you decide?
  Describe your logic when deciding. Do you consider the company's products, sales growth, earnings, management, price charts, etc? If so, what do you look for?
• Why do you think most people begin with trading stocks?
  Stock brokers are easier to find and most people have contact with others who trade stocks.  And, it requires less capital.
• Do you know how commodity prices are related to the U.S. dollar?
  It is an international standard to quote commodities in U.S. dollars (see example above). If the U.S. dollar is weak relative to other currencies, it costs more to buy imported commodities, such as oil.
• Had you heard of technical analysis before? Can you think of other factors a day trader should consider when trading?
  Stocks: Company, industry, and economic news - earnings releases, new product launches, etc.
  Commodities: Economic news and weather forecasts.
• Why is it becoming more difficult to earn profits trading?
  More sophisticated people are trading. Many use computer algorithms to trade.

Activity

Present the student with the following stock chart:

This is a three month chart for Yahoo!'s stock.  Each bar represents one day.

• In one week, where to you think the stock will be, higher or lower?  And, why?
  
  
• Place up/down arrows next to large areas (> 1 week) where many people purchased/sold the stock. 
  How do you know many people were purchasing it?
  - The price was rising. Only Demand > Supply can move the stock higher.
  What happened to the volume?
  - Typically, the volume increases as the price increases
  
  
• Do you see any spikes in volume or price?
  Circle them.
  Do you think it is more important to have spikes in volume on the way up or down?
  
  
• Circle the areas where the stock has difficulty penetrating or pauses?  
  Often the stock moves sideways in these areas.
  Draw a line across the chart at these levels. ($15.50 & $18.00)
  What was the relationship between supply and demand?
   - Supply = Demand
  Stocks have memories...well, the people who trade them have memories and view these levels as significant.
  
  
• With this knowledge, at which prices should I should consider buying or selling YHOO?

View My Other Lessons

LingoPass! LLC

http://www.lingopass.com

Topic: "Deed for Lease" (Mortgages)

Written by Chris Titus, CFA

Language: English

Level: Intermediate+

Warm Up Questions:

• List some of the causes of the global economic crisis that began at the end of 2008.
• Is one country to blame for these problems?  If 'yes', why?
  
• Do people have responsibilities for their own financial affairs?
• Do you know how many countries became insolvent (went into bankruptcy)?

Author's Note: Many people believe the United States caused the global financial crisis.  However, this is not accurate.  A detailed look at many countries around the world paints a picture of greed by local bankers.  In the end, each country and its citizens are responsible for their own financial affairs and problems. For example, home owners and businesses in Hungary taking on debt in foreign currencies (borrowing in Euros when they earn income in Forint) was a recipe for disaster when foreign exchange rates moved against them.  Iceland's goal of becoming a world financial center led banks there to accept leverage far beyond what they could tolerate as a nation.  Now consider Canada.  Despite bordering the U.S., Canada has been relatively untouched by the problems faced in America.

Vocabulary and Definitions (difficult words related to video or article):

• mortgage - money borrowed for the purpose of purchasing a home or other types of real estate.
• interest rate - the cost of borrowed money (expressed as a percentage)  
  

Example:
   You borrow $100 and are required to repay $110.  
   The additional $10 represents the interest portion paid.  
   The interest rate is 10% ($10 / $100 = 10%)

• refinance - to borrow money from one bank to pay off a debt with another bank.
• home equity (loan) - Money borrowed against the equity ownership in the house.  
  

Example:
   Home value = $1 million.  
   Mortgage = remaining amount owed on the mortgage = $600,000.  
   Home Equity = Home value - mortgage (amount owed) = $400,000

• second mortgage - a mortgage on property that already has a mortgage.  The second mortgage has weaker legal rights.  
• deed - the document showing ownership of a specific piece of property

Article Excerpt

In response to the recent mortgage crisis, Fannie Mae has provided troubled homeowners with the option of exchanging the deed to their home for a one-year lease.  The program, called "Deed for Lease", represents the government's latest effort to protect borrowers who cannot make the payments on their mortgages.  "With the collapse in real estate values, most of these people have no equity in their homes and are unable to refinance them as a way to pull money out to survive these difficult times," according to Harold Smith a private real estate investor.  He believes the program is a win-win for participants and communities.  Participants will likely pay lower rents than the mortgage payments currently owed and stay in their homes.

Discussion Questions: (possible answers listed below)

• Describe what is meant by a troubled homeowner.
  - Someone who is in foreclosure or pre-foreclosure
  
• Describe the exchange Fannie Mae is offering in the article.
  - To exchange the deed for a lease, allowing bankrupt homeowners to remain in their homes
  
• The article stated, "keeping people in their homes is good for communities."  Is this a good deal? Why? And, can you think of other benefits not mentioned in the article? 
  - Yes it is a good deal.  It helps maintain home values and keeps communities from falling apart
  
• Do you think most program participants have some equity value in their home? Why?
  - No is the likely answer.  The values of homes have probably fallen too far.
  
• Why do people refinance their homes?
  - 'To pay a lower interest rate', which can lower their monthly payments significantly
  
• Do you know which direction interest rates have moved recently?  Why?
  - Interest rates have moved lower.  During economic recessions, governments lower interest rates to encourage corporate investment.  Investment leads to an increase demand for workers.  Higher employment leads to increased consumption/spending and profits.
  
• If interest rates are lower, what will happen to your monthly mortgage payment?
  - Most people have fixed-rate mortgages.  For these people, they will see no benefit unless they refinance their home at the lower interest rate.  People with variable-rate mortgages will see an immediate benefit.
  
• Why might these people not be able to refinance their homes?
  - They may be unemployed, have a second mortgage, or are employed but have fallen too far behind on mortgage payments.
  
  

Role Play: Imagine you are a U.S. homeowner who is having difficulty making payments on your house, but not yet in foreclosure.  Would you like to join the program and exchange the ownership (deed) in your house for lower rent?  Discuss the pros and cons of joining this program.

View My Other Lessons

LingoPass! LLC

http://www.lingopass.com/blogs/