NEWSLETTER of December 23, 2020

The following content has been added at finexpert:

Oliver Wyman
DIE 50-MILLIARDEN-EURO-LÜCKE
Persistently low interest rates and a tightening of the stress scenarios of the European insurance regulator EIOPA will further dramatically worsen the solvency of many life insurers. Especially for traditional life insurers, investing in safe asset classes is becoming increasingly difficult: corporate bonds are yielding lower interest rates, (German) government bonds have had negative yields for quite some time - and the development of the Covid 19 pandemic and delimited Europe-wide government debt will cement this negative environment for years to come. The consequences are not only declining retirement benefits for customers due to steadily decreasing surplus participation. Life insurers are also finding it increasingly difficult to sustainably secure their solvency, i.e., their ability to pay from a regulatory perspective. >more

KfW Research
NACHFOLGE-MONITORING MITTELSTAND 2020
In the corona year 2020, companies are suddenly preoccupied with existential problems and put their planning for the future on hold - also with regard to handover to the next generation. KfW Research's succession monitoring provides a snapshot of this. First, at least many entrepreneurs whose retirement is imminent are sticking to their handover plans even during the crisis. Secondly, they have entered the crisis well prepared and are keeping succession processes already underway on track: just under half of the approximately 260,000 handovers planned for the next two years have been fully negotiated. But the risk of failed successions increases with the duration of the crisis. One basic problem is exacerbated by the crisis: There is a shortage of young talent due to unfavorable demographics and a weak start-up spirit. Removing obstacles to start-ups is central to the generational change in SMEs. >more

PwC
VENTURE CAPITAL MARKTSTUDIE 2020
Investors who finance startups take high risks - for example, with regard to the valuations and value potentials of their investments. Corresponding assessments are often based much more on empirical values of venture capitalists than on quantitative methods. This has an impact on the investment contracts, whose legal structures, however, are predominantly non-transparent. The "Venture Capital Market Study 2020" contributes in a special way to making transaction processes in the venture capital (VC) market more transparent and to elaborating the interdisciplinary bridge of financing, valuation and their legal structuring for Germany. >more

Bank for International Settlements
BIS QUARTERLY REVIEW: DECEMBER 2020
This Quarterly Review shows markets rebounded in November, but concerns about the daylight between valuations and the economic outlook persisted. Government bond yields stayed unusually low, supported by monetary accommodation, sustaining the search for yield. The relative performance of EME currencies partly reflected structural features of domestic economies. >more

MUTUAL FUND HOLDINGS OF CREDIT DEFAULT SWAPS: LIQUIDITY, YIELD, AND RISK
Wei Jiang, Jitao Ou, and Zhongyan Zhu
2020
This study analyzes the motives for and consequences of funds’ credit default swap (CDS) investments using mutual funds’ quarterly holdings from pre- to post-financial crisis. Funds resort to CDS investment when facing unpredictable liquidity needs. Funds sell more in reference entities where CDS is liquid relative to the underlying bonds and buy more when the CDS-bond basis is more negative. To enhance yield, funds engage in negative basis trading and sell CDS with the highest spreads within rating categories, and with spreads higher than those of their bond portfolios. Funds with superior portfolio returns also demonstrate more skills in CDS trading. >more

FINANCING CORPORATE GROWTH
Murray Z. Frank, and Ali Sanati
2020
Considerable research focuses on the aggregate impact of debt financing. We show that equity is empirically more important for firm growth than generally understood. An extra dollar of equity issuance is associated with an extra $0.93 of real assets, whereas an extra dollar of debt issuance is associated with an extra $0.14 of real assets. Firms issue equity first, then increase real assets, and finally issue debt while repurchasing equity. We explain this sequence using a model in which debt is tax preferred relative to equity but is subject to limited commitment. In the model, firms initially issue equity to finance investments. After they obtain assets that can be pledged to lenders, firms substitute debt for equity to benefit from interest tax deductions. We estimate the model and use it to evaluate the effect of several government policies on corporate growth through their impact on the sources of financing. >more