The Emerging Trend of Nontraditional Funding—Buyer Beware!

Due to liquidity shortfalls resulting from the credit crisis, many organizations are looking to nontraditional funding sources such as Sovereign Wealth Funds or Convertible Debt offered through Hedge Funds; however, executives should think about these options as a last resort. Nontraditional funding sources suffer from stability and liquidity risk (as we’ve seen in the current environment), and those risks are often unknowable and un-teachable to senior management or rating agencies.

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Our view: Finance officers are better off generating and liberating as much cash as possible internally or pushing traditional funding providers (banks) for more moderate innovations (e.g., special credit terms).

Mexico Hedges Nearly All Oil Exports for 2009

Financial Times, 11 November 2008

The world's sixth-largest oil-producing country moved to protect itself from falling oil prices with derivatives contracts as crude futures reached their lowest level in 21 months. According to the Financial Times, Mexico relies on oil for up to 40% of government revenue and is seeking far more coverage through financial instruments than in the past.

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Related News: Internal prediction markets are a low-cost, real-time, and accurate approach to estimating the likelihood of future events and can be used to inform hedging decisions. Join us for the upcoming teleconference, Overcoming the Stupidity of Crowds, for guidance on how to effectively deploy prediction markets.

Our view: Even if hedges are working they are going to generate losses some of the time, but if a company loses on a hedge because prices fall (or in the case of Mexico, gain), they are still in a better position because they are able to flatten the ups and downs in a commodity market and protect the company's (or country's) cash flow. Click here to learn about the advantages and disadvantages of the most frequently used financial instruments.

AIG's Retreat “Scandal” Provides Timely Reminder for Executives

CNN, 11 November 2008

A prominent politician has called for the resignation of Edward Liddy, CEO of AIG, following news that the firm held a retreat at an expensive resort; Mr. Liddy has only been in the role a few weeks. He defended the decision, saying that the retreat had not been for AIG employees but for financial planners to learn about AIG's products. In addition, AIG had only borne a fraction of the cost.

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Our view: In times of heightened scrutiny, perception is reality. Executives must be very sensitive to how investors, media and other employees may perceive any expenses that may be considered excessive; prudent effective business practices can become media and business relation nightmares.

Executive Compensation Comes Under Fire

Bloomberg, 11 November 2008

After receiving government assistance, many financial institutions are facing pressure from legislators and taxpayers alike to forego their traditionally hefty bonuses. Citing the government bailout, the financial industry’s reluctance to lend, massive credit losses, and large layoffs, many say that the era of generous bonuses has passed. Some experts are forecasting a 20 to 35% drop in bonuses across the finance industry, with a 70% drop for top executives.

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Our view: Corporate Leadership Council research reveals that during periods of business uncertainty, retention of key talent becomes an organizational imperative and companies often mistakenly turn to retention bonuses. Not only is that an unwise choice, it may also be impossible in the current credit environment. Companies should develop customized strategies that incorporate development and communication strategies while ensuring the retention efforts are focused on critical talent and critical positions to achieve maximum return on investment.

Consumers Shun Chic in Favor of Cheap

The New York Times, 9 November 2008

In the new line of advertising, gone are mansions of the "everyday person," and back again are coupons as companies start promoting their products as bargains rather than status symbols. In the current climate retailers are increasingly gearing products toward more cost conscious shoppers.

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Related News: Starbucks Reports 97% Drop in Net Income as Coffee Drinkers Cut Back, The New York Times—11 November 2008

Our view: Consumers' discretionary spending is decreasing in Q4 compared to previous years. Retailers can defer the impact of those trends by looking more closely at the trade-offs that consumers are making in their purchases in the downturn economy and expanding inventory and marketing for the categories that are outperforming and by changing their pricing strategies.

Daily Capital Markets Review: Rate Cuts No Match for Slowdown Fears

This summary includes news items regarding global liquidity, the TED spread, commercial paper and T-bill rates, currencies and commodities, and corporate debt spreads and new issuances. If you would like to receive the Review after markets close (instead of the next morning), please click here.

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