IFM volume 5 07 04 2014

IFM Independent Financial Magazine Issue 05 / 07 APRIL 2014

Banks Balancing Act Risk Management 5 6

Kings Entertainments 8

The Dollar Dip 9

Private Equity 11

Financial Repression 14

What Is Happening at Heart of Midlothian FC? Part 1 15

Independent Financial Magazine IMPORTANT IFM magazine publishes information and ideas which are of interest to investors and students. It does not provide advice in relation to investments or any other financial matters. Comments published in IFM magazine must not be relied upon by readers when they make their investment decisions. Investors/ Students who require advice should consult a properly qualified independent adviser. IFM magazine, its members do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions.

Members of staff of IFM magazine may hold shares in companies mentioned in the magazine. This could create a conflict of interests.

Where such a conflict exists it will be disclosed. In keeping with the existing practice, reporters who intend to write about any securities, derivatives or positions with spread betting organisations that they have an interest in should first clear their writing with the editor. If the editor agrees that the reporter can write about the interest, it should be disclosed to readers at the end of the story. Holdings by third parties including families, trusts, self-select pension funds, self select ISAs and PEPs and nominee accounts are included in such interests.

2

Independent Financial Magazine vol.5 07.04.2014

The Team

Editor Pete McCarthy

Editor Alan Konopka

Designer Sarah Aoki

Sohail Ahmed

Jeremy Kempke

Kristopher Connelly

Farhan Tahir

Independent Financial Magazine

Issue 05 Published 07 April 2014 Front Cover #05 New York, 1931

Editors View 2013 was a blockbuster year for equities. 2014 not so much. As we enter Q2, what can we expect from the financial markets? Taper is clearly on everyone’s mind. Also, how will the Japanese deal with their tricky monetary and fiscal balance and moreover, will substantial progress be made with regards to risk management and balance sheet repair of the major banks?

Over the coming issues of IFM, we are pleased to bring you a detailed understanding of the mechanics of financial risk management, written by CFA and PhD student, Sohail Ahmed. The series will kick off with an introduction to the types of risk management procedures firms adopt, whilst in later articles, a deeper analysis of risk will be presented.

As always, enjoy the articles folks and strap yourself in for a volatile but exciting second quarter!

Capital Markets FINANCIAL MARKETS INDICATORS 07/04/2014

Indices Weekly Change: 1.21% -0.08% 0.00% 1.75%

Commodities

Level: 6,695.55 1,865.09 3,172.43 15,063.77 14.41 Price:

Gold 100 oz.

Copper Brent Crude

$1,301.40 $3.00 $106.20

0.29% 1.96% -0.53%

Rate:

Weekly Change:

1.6580 1.3702 103.3300 0.8265

-0.35% -0.37% 0.49% -0.01%

Yield 24/03/2014 2.74% 2.76% 0.60%

Yield 31/03/2014 2.73% 2.72% 0.63%

FTSE 100 S&P 500 EURO STOXX 50 Nikkei 225 VIX

Currencies GBP/USD EUR/USD USD/JPY EUR/GBP

Bonds 10Y UK Gov 10Y US Gov 10Y Japan

Volatility (Std Dev): 15.9707 1.511 12.5841 190.332

Weekly Change:

Yield 07/04/2014 2.68% 2.73% 0.65%

Independent Financial Magazine vol.5 07.04.2014

3

Contents IFM 07 April 2014

The Banks Balancing Act Risk Management King Entertainments The Dollar Dip Exchanges of the week Special Report : Private Equity

Private Equity Part 2 Financial Repression What Is Happening at Heart of Midlothian FC? Part 1

4

Independent Financial Magazine vol.5 07.04.2014

The Banks Balancing Act

by Pete McCarthy

T

he Lehman collapse in September 2008 sent seismic shocks that were felt not just within the financial system but rattled the real economy and real people. Unemployment rocketed, output contracted and central banks balance sheets bulged to unprecedented levels.

It was time for central banks to provide the lifeline everyone so desperately needed. The policy: slash interest rates and implement quantitative easing (QE).

As we know, the QE policy has received hefty criticism by many high profiled economists, as they argue QE will cause a long-term conundrum of resource misallocation, high inflation and will result in many markets to be ‘out of whack’ with traditional themes.

The task of a central banker is the equivalent of competing in an egg and spoon race. On the one hand you know the economy needs to hit ‘escape velocity’ i.e. take the lead in the race, but on the other, you know a move too fast and the egg, the

economy in this instance, will fall off and shatter. Here are just a few paradoxes of policy so too speak that Governors of major central banks are faced with.

First off, you want people to save more therefore increasing investment, but not just yet because you need consumer spending to kick-start, avoiding a fall in consumption.

Secondly, you want banks to rebuild their balance sheets but not just yet, as this comes at the expense of lower lending ability.

Finally, the government needs to get its fiscal house in order to reduce the extortionate debt levels, but not just yet because that will also bring the economy to its knees.

The bank needs to keep the economy afloat yet there are many structural changes that need to take place over the medium to long term. Take Japan for instance. The Bank of Japan is providing monetary support via its own version of QE, yet the government needs to reduce its debt

levels so implemented a consumption tax to boost revenue. These balancing acts occur regularly.

Moreover, on a more macro level, such balancing acts take place on the foreign exchange market. Let’s continue with the UK as the example.

The pound is relatively strong against most other major currencies. A stronger pound helps the UK consumer import more goods, as it means they can get ‘more bang for their buck’. Likewise for vacations aboard it’s great news. I can buy 3 shoes instead of 2 shoes.

But on a more macro level, a stronger pound hampers exports. This is something the Eurozone has to deal with at the moment. They need an export lead growth story but a strong euro, due in part from significant dollar deprecation is stalling much needed momentum.

I can guarantee you Joe Blogs on the street knows what an egg and spoon race is, but whether the central banks will win this race is a question, quite frankly no one knows the answer too.

Independent Financial Magazine vol.5 07.04.2014

5

Risk Management Sohail Ahmed, FRM PhD Student (Finance)

by Sohail Ahmed FRM

Risk Management

This page is dedicated to the understanding of risk management. In the beginning, a brief introduction of a risk management process, risk governance structure, and types of risks faced by a his page is dedicated to the exhibits risk taking characteristic of whenever the exposure levels fall firm will be provided. Later, this page will be dedicated to the Market Risk Analysis Tool Pack. The understanding of risk management. a human being.

With risk comes the outside the assessed target ranges. The Market Risk Analysis Tool Pack will introduce the Standardized Approach (under Basel Accord), In the beginning, a brief(VaR) introduction possibility of a reward.

Therefore, risk and riskMonteCarlo management process is continuous Value-­‐at-­‐Risk using Variance-­‐Co-­‐Variance, Historical Simulation, Simulation, of a risk and management process, risk management is one of the important and subject to evaluation and revision.

Stress Testing techniques. governance structure, and types of and critical components of the overall risks faced Risk by aM firm will be provided.

Effective risk A typical application of risk anagement Process and investment the Types of Rprocess. isks.

Later, this page will be dedicated to the management is a process not just an management process for a business Investment is an Pack. activity that exhibits characteristic of a human being. risk in comes Market Risk Analysis Tool The activity risk that taking involves the identification, entity is With shown the following the possibility of a reward.

Therefore, risk management is one of the important and critical Market Risk Analysis Tool Pack will assessment, and control of several Exhibit1. components of the overall investment process.

Effective risk management is a process not just an introduce the Standardized Approach sources of risk. These sources of risk activity that involves the identification, assessment, and control of several sources risk. (under Basel Accord), Value-at-Risk are classified into the financial and In this exhibit,of we see These that the firm faces sources of risk are classified into the financial and nonfinancial risks. Identification of the sources of (VaR) using Variance-Co-Variance, nonfinancial risks. Identification of the both the financial and nonfinancial risk implies classifying various risk. risks.

Assessment Historical Simulation, andrecognizing MonteCarloand sources of risk impliesexposures recognizingto and The firminvolves reacts tothe these risks by of appropriate ranges for various exposures and the measurement of these policies Simulation,establishment and Stress Testing classifying exposures tocontinuous risk. establishing risk management execution oinvolves f appropriate adjustments whenever the exposure levels techniques.exposures. Control involves the Assessment the establishment and procedures.

As a first step, the firm fall outside the assessed target ranges. The risk management process is continuous and subject to of appropriate ranges for exposures sets the level of risk that it is willing to evaluation and revision.

Risk Management Process and the and the continuous measurement of take and able to bear.

Types of Risks. these exposures. Control involves the of risk execution management process for a business entity is shown in the InvestmentA typical is an application activity that of appropriate adjustments

T

following Exhibit 1.

Nonfinancial Risks

Data

Policies Procedure s

The Firm

Financial Risks

Risk Tolerance

Identify Risks

Execute Risk Management Strategies

Execute the transactions

Price Strategies

Select right Strategy (ies)

EXHIBIT 1

Quantify Risks

Risk Level Adjustment

Financial Derivatives Non-­‐ Derivatives

In this exhibit, we see that the firm faces both the financial and nonfinancial risks. The firm reacts to these risks by establishing risk management policies and procedures. As a first step, the firm sets the

6

Independent Financial Magazine vol.5 07.04.2014

The data collection and information sources help it to identify the risks and quantify the risk exposures to each type or source of risk identified. These steps define the effective mechanism of risk identification and measurement. The firm can then take steps to adjust the risk exposures whenever these exposures deviate from the defined risk tolerance levels. The risk adjustment is in itself a separate process which involves execution of the risk management strategies. This process consists of steps of identification of risk management transactions, pricing and execution. The risk management process loops around the quantification of the risk exposures and continues in that manner. In this way it provides continuous monitoring and adjustment of the risk so that the risk level is maintained within the defined tolerance levels.

Risk management plays an important role in the risk governance structure.

Since senior management is responsible for all kinds of activities in a firm, their involvement is must for the success of the risk management. This leads to the establishment of the policies, procedures and standards under the risk management framework. The risk management system can be either centralized or decentralized. Under the centralized risk management

system, a single group monitors and controls all the risk-taking activities of an organization. However, in the decentralized system, the responsibility falls on the manager of each business unit to monitor and control the risk.

There are advantages of decentralized risk management system as the people managing risk would be closely watching the people taking those actual risks. The centralized system offers the benefits of the economies of scale as well as allows taking the benefits from recognition of offsetting exposures that a firm faces in day-to-day operations. Suppose a UK company has two subsidiary firms.

One subsidiary firm buys from the US and the other subsidiary firm sells to the US. The transactions of the both firms are denominated in US dollars.

Therefore, both firms are exposed to GBP/USD exchange rate risk. Under the decentralized system, each subsidiary determines its foreign exchange risk and hedges it. However, in the centralized system, both transactions have offsetting effects. The overall exposure to the foreign exchange risk is reduced and thus, the costs of hedging will also be lower.

Not only the benefits of offsetting thus reduced risk exposure are obtained, but also the benefits of diversification can be achieved. For example, two subsidiaries

of a firm are exposed to the interest rate risk by borrowing funds with different maturities. The first subsidiary issues bonds with long-term maturity. The second subsidiary issues bonds with short-term maturity. For the company, the overall exposure to the interest rate risk may be less than the sum of the individual exposures reported by each subsidiary because the short-term and long-term interest rates are not perfectly correlated.

The centralized risk management system is recently termed as Enterprise Risk Management. Under this system, a firm identifies all the risk factors to which firm is exposed and then measures the exposure to these risk factors both before and after the diversification benefits.

The exposures to various types of risk are categorized into financial risk and nonfinancial risk. Financial risk includes market risk, liquidity risk and credit risk. Nonfinancial risks include model risk, settlement risk, regulatory risk, tax risk, sovereign or political risk, operational risk, and accounting risk.

Market risk refers to the risk related to the exchange rates, interest rates, commodity prices, and stock or equity prices.

Independent Financial Magazine vol.5 07.04.2014

7

King Entertainments An act of brilliance?

by Jeremy Kempke

R

ecently the financial markets have started to become wary of a potential technology bubble popping. I will not go into any detail discussing this, but let’s just say that prices of tech-stocks currently stand at unusual high levels. Are they worth that amount of money? For this article it doesn’t matter. Additionally we are experiencing a wave of Initial Public Offerings (IPOs) as discussed within this magazine several weeks ago. From this, one can imagine the amount of hype an IPO from a major technology company would receive; close to the Twitter or Facebook level certainly.

Almost two weeks ago the industry has seen exactly this coming. On 25th March, King Entertainment (KING:US) officially listed on the NYSE, raising $500M therefore valuing itself at a grand total of $8bn. Many have argued that KING’s astonishing books, in particular for 2013, are simply down to the success of one product – Candy Crush. Is King a one hit wonder? Seeing that it dropped 12% on the first day of trading the general consensus seems to be so. Was the IPO a bad idea?

Did the management make a huge mistake? Or did the fault lie with the lead underwriters (namely JP Morgan, Credit Suisse and Bank of America Merrill Lynch)?

8

Independent Financial Magazine vol.5 07.04.2014

One could argue that this IPO was actually an act of brilliance. You heard right, no sarcasm. But before I go into detail, I believe one needs to really understand the goal of an IPO. It’s quite simple: to raise money.

Most people tend to forget the fact that come the second day of trading the company doesn’t have much interest in its share price unless it plans to hold further offerings, keep clear of takeover attempts or simply maintain good publicity. As the term “underwriter” suggests several Investment Banks share the privilege of ensuring the issuer receives the full money it intends to raise.

Essentially the banks buy the shares at the agreed offering price and sell them on to potential investors. Given the 12% drop, those banks will face tremendous difficulties selling on those shares with a profit (partly explaining why Goldman Sachs didn’t get involved at all). Prior to the actual IPO, the banks and the corporation’s top officials will hold presentations to potential investors in order to a) encourage share sales then and there and b) estimate what the market value of the client’s equity stands at. This is called a roadshow. This process results in non-binding commitments, called “subscriptions”, to purchase shares and leads to the saying “Company X is Y times over-subscribed”. Where is the brilliance? The brilliance lies right at the origination of the deal;

the initial valuation proposed by King Entertainments. Just recently I was talking to a friend of mine, conducting a small experiment I have come across during my studies.

Me: “Do you think that in Burma the population is more or less than 10M?” Friend: “Less.”

Me: “How many people do you think live in Burma?”

Friend: “Around 7M maybe.”

Me: “It’s 52M actually” He did have a rough idea of the size of Burma, but based on the initial question, estimated it to be close to 10M. Psychologists call this the “Anchoring Effect”. Arguably King Entertainments took advantage of exactly that. Given the current market conditions for technology companies it was a golden opportunity to raise as much money as possible and going by the drop in price, King did just that. By setting a company valuation that is ridiculously high alongside the fact that companies within that sector are extremely difficult to price it seems to make sense to use the idea of the anchoring effect. Maybe the underwriters were just a little bit too keen on that commission (obviously raises proportionally to the issuing price). If Goldman Sachs doesn’t want to get involved, then you shouldn’t either. King Entertainments 1 : Investment Banks 0.

The dollar dip

by Pete McCarthy

S

entiment towards the world’s largest economy has been tilting to the positive side of late. However, the dismal weather conditions has thrown a sizeable spanner in the works with regards to economic data. The question at the moment is, should you take the recent US data with a pinch of salt?

The past week has seen the greenback make an impressive run in anticipation of a stronger US economy and a fall in the unemployment rate. On Friday things turned sour as the non- farm payrolls (NFP) report spewed out a forecasted figure, causing markets to sell off amid a risk- off mood. Equity markets took a nosedive whilst safe haven assets saw gains with the yen and gold making ground.

You might be reading this thinking, so the US added 192,000 jobs (all in the private sector) and the forecast was a number of 200,000; in effect matching forecasts and given recent weather disruptions the figure is actually quite acceptable.

Now that’s the traditional view and one would expect stock markets to rally and take a risk- on mentality. We saw exactly the reverse, but why?

Perhaps the markets were expecting a much higher number. A few large investment houses were expecting a figure in the mid 300,000s. Remember, the consensus is not always the most accurate or reliable source.

course, there are a multitude of factors that were responsible for the moves we witnessed on Friday.

Taper is back. Well it never went. A strong US result means the Federal Reserve (Fed) have a bigger case to take its QE program off the table.

Consequently one would expect to see a fall in bond prices, but yes, you guessed it, the exact opposite happened. The large spike in the US 10yr was a sharp reaction to the data but then traded sideways at the new higher price level for the remainder of the day.

The Fed is continuing down its tapering path whilst European profits are still elusive. In the UK, sentiment is picking up, in part due to the stronger retail sales and is helping to offset a weaker export figure thanks to the staggering Eurozone.

Over the past 12 months, the US dollar has shed around 15% to sterling.

However since the opening of 2014, the current rate is almost identical to what it was on the 1st of January (1.6566).

Has cable plateaued for the time being?

As the Fed tapers and eventually ends QE all together, cable will likely take a hit to the downside, especially if the UK’s biggest trading partner is still stagnant.

Economically speaking, the relationships that one has to get their head around to correctly spot an outcome is very, very challenging, particularly when traditional thinking was chucked out the window a while ago.

One crucial takeaway the market has taught us, is drops in relevant markets do not automatically mean the underlying economy is worsening.

Monetary policy has caused seismic shifts across many asset classes but of

So the key question on everyone’s mind is, ‘where do we go from here?

Time will tell if the dollar dip is a continuing theme, but one thing’s for sure, the greenback will stage a solid fight back for the rest of 2014.

Independent Financial Magazine vol.5 07.04.2014

9

Exchanges of the week

M

easured on a market capitalization basis, the Tokyo Stock Exchange (TSE) is the world’s second largest bourse (January 2014) and was founded over 130 years ago in 1878.

All trading sessions at TSE commence at 09:00 a.m. to 11:30 a.m. and from 12:30 p.m. to 3:00 p.m. (local time) on all days of the week except Saturdays, Sundays and holidays.

94 domestic and 10 foreign securities companies participate in TSE trading.

The TSE works closely with London Stock Exchange (LSE) to develop jointly traded products and technology.

In 2008, the stock exchanges of Tokyo and London announced a new joint venture, a Tokyo-based market, which will be situated on the LSE’s Alternative Investment Market (AIM).

The major indices traded on Tokyo Stock Exchange are the Nikkei 225, TOPIX, and the J30 (an index of large industrial companies).

Tokyo Stock Exchange Frankfurt Stock Exchange

T

he Frankfurt Stock Exchange was founded in 1585 and is owned and operated by Deutsche Borse Group. It is classified as 10th largest stock exchange in the world by market capitalization (January 2014).

Currently there is no open-cry floor trading as the exchange moved into an electronic execution system. All trading is completed exclusively via the Xetra platform that is used by more than 14 international exchanges.

There is more that 250 international trading institutions and more than 4,500 traders actively trading in Frankfurt.

Investors who directly connect to the Frankfurt Stock Exchange represent 35% of the world’s investment capital.

Some indices that are actively traded in Frankfurt are DAX, DAXplus, CDAX, DivDAX, LDAX, MDAX, SDAX, TecDAX, VDAX and EuroStoxx 50.

10

Independent Financial Magazine vol.5 07.04.2014

Special Report: Private Equity

NY Times.com Š Daniel Vasconcellos

Independent Financial Magazine vol.5 07.04.2014

11

Special Report : Private Equity

Private Equity Part 2

by Alan Konopka

Mezzanine or Growth?

A

basic overview of private equity in last week’s edition of IFM gave us some fundamental principles of the industry. We discussed different types of funds that exist within Private Equity (PE) firms with an emphasis on Venture Capital (VC) and Buyout funds. In this issue I will discuss the Mezzanine and Growth Capital that are too very important but not as well known types of PE financing.

Mezzanine capital is simply the issuance of debt with some attached rights to convert it to an ownership or equity interest in the issuing company, providing the repayments of interest or principal are in orderly or strategic default.

In practice mezzanine capital is used to fill a financing gap between less expensive debt (senior debt, junk bonds issue etc.) and equity capital.

The higher cost of mezzanine finance arrangements is due to its nature of being unsecured, subordinated (or junior) obligation in a company’s capital structure. Private equity firms will usually resort to mezzanine capital to reduce the amount of the total capital invested and when other sources of financing are already exhausted.

Additionally, middle market companies with restricted access to debt and equity capital markets (inability to raise new capital) might find flexibility of private mezzanine capital as an attractive option. Choice of the mezzanine financing might also be

12

Independent Financial Magazine vol.5 07.04.2014

due to the company’s low credit rating and consequently increased borrowing costs, either from a bank or via other sources.

Mezzanine funds within PE firms tend to be of smaller value than VCs or Leveraged Buy-out (LBO) operations.

Mezzanine funds of KKR PE closed on over $1.0 billion in 2011. Within the industry, mezzanine capital seems to be an addition to the core operations of the firms. Head of KKR’s mezzanine business, Frederick M. Goltz said, “We have a healthy pipeline of opportunities and look forward to putting this additional capital to work by continuing to partner with private equity sponsors and management teams to support their objectives”.

Growth Capital on the other hand is a minority investment in companies that are looking to expand into new markets or new industries. Growth Capital similarly to mezzanine capital does not shift the control of the business to the finance providers but simply supports the growth strategy. Unlike VC, growth financing mostly targets mature companies with sufficient earnings to service debt obligations, but an acceptable level of debt is required that will not prevent additional future debt raisings. The structure of growth capital consists of common or preferred equity, or a mixture of the two.

fig 1 : Global PE fund-raising

fig 2 : PE IPO’s since 2001

Source : EY Report, Global private equity watch 2014

“Current economic conditions of cheap financing and high valuations will prompt many PE firms into exit strategies”

Special Report : Private Equity

Save or sell?

Private Equity versus the Society

Distressed Capital is another important variation of a PE operation and seeks to invest in financially distressed companies. There are two main types of the PE investment and those include ‘Distressed-to-control Financing’ in which investment in debt is made with hope of priority claim on firm’s assets in an event of insolvency and ‘Turnaround Financing’ in which investment in both debt and equity is made in order to support the firms financial stability and bring back to black by making it more cost efficient Hedge funds also employ a variety of distressed investment strategies, which includes active trading of distressed firm’s debt.

Cost efficiency was an objective that PE firms have raised many social concerns over the years. It is seen that the industry’ aim of producing hefty returns to the investors is in direct conflict of the firm’s employees.

The public debate has been largely focused on buyout investments. It is perceived that the buyout transactions are strongly correlated with subsequent layoffs of the employees. Although such practices do occur, within the industry it is not as common as the public portrays. Buyout target companies usually undergo restructuring which involves hiring staff, rather than laying them off. Also, many PE firms have endorsed and promoted the Principles for Responsible Investment (UN PRI) and abide by them.

Recent academic research suggested that, on average, the buyout transactions

have a positive or at least neutral impact on the target firm’s competitiveness, profitability and longer‐term prospects.

Deeper research is required to fully understand the impact such processes and decisions have on the wider society.

Private Equity activity tends to come in waves similar to those of mergers and acquisitions and initial public offerings. Current economic conditions of cheap financing and high valuations will prompt many PE firms into exit strategies from existing deals and involvement in new ones. Table below shows the most recent exit transactions made by private equity firms. Are we experiencing a boom in transactions, or is it only due to the strange times we live in?

fig 3 : PE investment by sector, by value and volume

Table : Top 10 in 2013

Independent Financial Magazine vol.5 07.04.2014

13

Financial Repression

by Farhan Tahir

F

inancial repression has been used throughout history, in both the developed and developing world. In the post World War 2 era, financial repression enabled the US to reduce its debt-to-GDP levels from 122% in 1945, to about 30% in 1979. Likewise, Japan has attempted to use financial repression in order to stabilise its economy - an approach that other East-Asian countries have since imitated - thus making financial repression a truly global economic tool that is used in both the developing and the developed world. But is it a good thing?

Before getting to that, it may be useful to describe what financial repression is. In its simplest definition, financial repression is negative interest. Its purpose is to essentially allow governments to increase the amount of money that is available to them (explains Japans huge debt-to-GDP levels...). Essentially, it’s a move away from ‘laissez fair economics’ and is a shift to increased regulation, in which the main benefactors are governments (as in a financially repressed economy, banks offer poor interest rates to savers, which government debt is expected to beat, therefore transferring funds to governments). It’s often likened to a tax - with interest rates being negative, savers lose out given that their savings erode with the passage of time. In its

14

Independent Financial Magazine vol.5 07.04.2014

tax sense, it’s actually quite a powerful Taking an article based on this Chinese tool, given that in some countries, economy, it was shown that financial it accounts for 20-40% of total tax repression holds back GDP growth revenue. But is it a good thing? (see chart below). And obviously this If the only thing we cared about was isn’t a good thing. government debt, then yes. Looking at the shutdowns that occurred in the However, in light of financial repression US in 2013, it’s clear that too much being bad for the economy, it’s quite debt is dangerous. So, given that disturbing to see that major economies financial repression can liquidate debtare actually using financial repression levels (basically make the currency again (evident in both UK and US)... In lose value...), then it’s a good thing to the US, it was reported that pensioners have lower debt levels. With OECD are worried in case financial repression countries having historically-peaked kills of all their savings - and that point debt levels, in this sense it’s good to in itself shows financial repression can reduce it. be stupid, unless the only thing we care But the more compelling arguments lie about is the government.... in the ‘cons’ side - financial repression is a poor tool. And there are many reasons in support of this.

How Much Does Financial Repression Hold Down GDP Growth?

Firstly, financial (Percentage Points) repression has historically been linked with poor economic growth - it causes the financial sector to be ‘repressed’, and this actually defies the efficient capital allocation goal of financial Source: Huang and Wang (2010). intermediaries.

What is happening at Heart of Midlothian FC? Part 1 The Romanov Era

by Kristopher Connelly

H

eart of Midlothian FC also known as Hearts, is a football club based in Edinburgh. We as students of Heriot-Watt University see their players walking around the campus in their training gear usually after or before a training session and they seem to be happy. I’m almost certain it’s just a brave face.

For right now at Hearts lays a period of uncertainty and desperation as they try to keep the club going through its day-to-day business activities. Let’s see how this financial distress all began for Hearts.

Ten years ago, Hearts were in financial trouble for a separate reason. Huge debts owed resulted in management taking the brave decision to try and sell their stadium Tynecastle and work a deal with the Scottish Rugby Union to use Murrayfield Stadium.

After agreements for the sale of Tynecastle and the use of Murrayfield were completed; a glimmer of hope was seen with the arrival of Vladimir Romanov, the chairman of UBIG investments.

Vladimir Romanov was looking to

invest in Scottish Football for the interest of seeing how well Lithuanian footballers could do abroad. He tried buying Dundee, Dundee United and Dunfermline but each club turned him away. He then approached Hearts with the promise that the Stadium would be kept and the debt would be wiped; this was very popular with the fans.

Hearts in 2008 announced an issue of debt to equity in order to reduce the debt by £10 million which was agreed at a general meeting. Reducing the debt to £25 million was great for the club and things began to look better.

However this wouldn’t be the case.

In 2009, 2010 and 2012 Hearts were issued with winding up orders by the Court of Session for not paying

In 2004 Vladimir bought 19% shares in Hearts and immediately called for an AGM to exercise the clause in the sale of Tynecastle which allowed them to discontinue the agreement.

Slowly for the rest of that decade Romanov acquired more and more stock to become the vast majority shareholder of Hearts with 80% of the shareholding. Footballers from Lithuania during his venture did join Hearts from FBK Kaunas in which some became very successful.

Although there were many great times under the reign of Romanov for Hearts; there were also unsettling times. On numerous occasions Hearts failed to pay their players on time and they owed a reported £36 million debt.

HMRC tax bills on time. Every time they managed to agree a deal with HMRC but there was a sign of distress at the club.

Then it began.

In 2013, two Lithuanian companies UBIG Investments and Ukio Bankas became insolvent. Both companies were owed the vast majority of Hearts debt with the combined total of £23 million.

With uncertainty over whether or not the liquidator of the Lithuanian businesses would force Hearts to pay back the full amount owed, Hearts entered administration.

This sees the introduction of BDO and Bryan Jackson.

Independent Financial Magazine vol.5 07.04.2014

15

“Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway.�

- Warren Buffet -

IFM Independent Financial Magazine