Significant price changes are not only observed after changes of the rating, but also after changes of the rating outlook. In many cases technical factors represent a major reason for bond price changes after a negative rating action. In particular, large price movements can be observed when investment restrictions of institutional investors are triggered by a rating action.
A good example is the downgrade of Fiat in June 2002. The downgrade from Baa2 to Baa3 induced a large sell-off because investors anticipated
a further downgrade to high yield. But Figure 9.1 also shows that bond prices already fell significantly when Moody’s put Fiat on review for downgrade.
Empirical studies by Weinstein (1977), Hand et al. (1992) and Kliger and Sarig (2000) highlight the following relationships between rating changes
and a corporate issuer’s bond and stock prices:
- Bond prices adjust to a new rating.
- Equity prices also react on rating changes, usually opposite to the bond price movements.
- Surprise upgrades tend to result in a reduced implied equity volatility.
There is no indication that new rating information has an impact on firm value. According to the Asset Substitution Theory equity and bond prices react in opposite directions to rating changes, which ultimately leads to changes in the ratio of the market value of equity to debt.
In order to arrive at a rating, one crucial assumption is made: credit worthiness is a stable concept. This means that historical data may be used to transform the information obtained from a company into estimates for default probability and loss severity. Since fundamentals change gradually over time, multinotch rating changes are unlikely. Rating agencies therefore use Outlooks and Watch Lists as leading indicators for potential rating changes. They signal in which direction the next rating step will probably occur. If, for example, a negative outlook is assigned, the rating agency usually defines certain criteria that have to be met by the issuer over a certain period of time, otherwise a rating downgrade can be expected. An example would be that a company must achieve positive free cash flows within a predetermined time-horizon. The failure to do so will result in the loss of the current rating.
Furthermore, a strong brand can enable the product to overflow from one market into another, allowing the brand to spread in popularity. This is particularly the case in industries that are affected to a greate or lesser degree by fashion. For example, the strength and popularity of coffee houses such as Starbucks grew during the 1990s, spreading from the American north-west to the whole of the country and then to Europe. Brands can extend the life of a product, as by their nature they combine trust, respect, profile and marketing spend. This can often be used to inject new life into a stagnating product or even a whole industry.
The example of Danish toymaker Lego producing toys linked with films is an example of this trend. Lastly, brands provide a valuable, market- oriented focus around which firms can organise themselves. The brand manager is often directly responsible for what the product offers as well as how it appears to the customer.
Posted in credit cards, credit score, economy, finances, get out of debt, income, international markets (Tags: Aids finance, estate, Estate Planning, heir, income, inheritace, insurance, Interest, joit, last will, Market, market cycle, market cycles, rate, tenancy) | Comments Off
This links with the next advantage: the ability of brands to build customer loyalty, again because of the trust and even affection that they can generate. Customer groups can identify preferred brands easily, becoming repeat purchasers. A classic example is the old adage “no one ever got fired for buying ibm”. In this extreme case, even when consumers did not necessarily like the product, they still respected the brand.
Another advantage of brands is that businesses can launch profitable new products with a flying start by exploiting the popularity and strength of an established brand. Cherry Coke and Diet Coke are examples of this approach, where the strong, established Coca-Cola brand (probably one of the strongest commercial brands in history) underpinned the launch of these two new drinks. This reinforced the brand still further by attacking the competition, adding another dimension to the brand (innovation) and developing new markets (such as the diet soda market). There are two benefits: brands often make it easier to introduce new products by exploiting “brand equity”; and they provide opportunities to open up new market segments. For example, food manufacturers often exploit their position to create sub-brands of diet versions (such as an established yogurt manufacturer successfully launching a low-fat product).
Posted in CEO, business competition, cash reserves, loans guide, money guide, pricing policy, shareholders (Tags: Aids finance, annuitant, Annuities, banking, banks, Bearish Patterns, Budgeting, cash, company costs, currency cycles, Debt, economics, estate, Estate Planning) | Comments Off