voluntaryXchange

Bond Covenants are Getting Weaker as the Market Gets Stronger

Lots of people think the economy is still weak, but it’s been over a year since we started hearing that investors were willing to accept weaker covenants in exchange for better returns. From The Wall Street Journal, here’s a piece on how the covenants of bond issues have weakened as potential buyers have gotten less picky.

Corporate bonds are bought by investors who want the steady (interest) income paid as their semi-annual coupons.

But, a bond is a bundled good: the returns it kicks off, and the covenants that protect the buyer.

Bonds are issued in big bunches, and the covenants are the rules governing the whole bunch that is issued together.

So, if you want a higher return from the seller, they’ll gladly give it to you if you’ll accept weaker covenants.

For example:

When Tenet Healthcare Corp. sold $600 million in junk bonds in August, investors had fewer protections than they had in previous Tenet bonds. The bond deal from the Dallas hospital operator and health-care company lacked an asset-sale covenant, which would have forced the company to use proceeds from the sale of a material asset to buy another asset, make capital expenditures or repay bond investors.

Those covenants also prevent companies from using cash from asset sales to pay salaries. …

… Bonds issued by Chesapeake Energy Corp., an Oklahoma City company that is the second-largest U.S. natural-gas producer, illustrate how new bonds are being sold. In an August sale, Chesapeake sold $2 billion worth of junk bonds maturing in eight and 10 years. Chesapeake is using the bond sales to pay down existing debt and for general corporate use, the company said in an August news release.

According to Covenant Review, neither bond offers a "change-of-control" covenant. When that protection is included and a company is sold, bondholders can sell back their bonds at 101% of par value. …

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Interesting Viewpoints On Anti-Depressants

I don’t always like Marcia Angell, but this is provocative:

… Faced with his findings that nearly any pill with side effects was slightly more effective in treating depression than an inert placebo, Kirsch speculated that the presence of side effects in individuals receiving drugs enabled them to guess correctly that they were getting active treatment—and this was borne out by interviews with patients and doctors—which made them more likely to report improvement. He suggests that the reason antidepressants appear to work better in relieving severe depression than in less severe cases is that patients with severe symptoms are likely to be on higher doses and therefore experience more side effects.

To further investigate whether side effects bias responses, Kirsch looked at some trials that employed “active” placebos instead of inert ones. An active placebo is one that itself produces side effects, such as atropine—a drug that selectively blocks the action of certain types of nerve fibers. Although not an antidepressant, atropine causes, among other things, a noticeably dry mouth. In trials using atropine as the placebo, there was no difference between the antidepressant and the active placebo. Everyone had side effects of one type or another, and everyone reported the same level of improvement. Kirsch reported a number of other odd findings in clinical trials of antidepressants, including the fact that there is no dose-response curve—that is, high doses worked no better than low ones—which is extremely unlikely for truly effective drugs. “Putting all this together,” writes Kirsch,

… Leads to the conclusion that the relatively small difference between drugs and placebos might not be a real drug effect at all. Instead, it might be an enhanced placebo effect, produced by the fact that some patients have broken [the] blind and have come to realize whether they were given drug or placebo. If this is the case, then there is no real antidepressant drug effect at all. Rather than comparing placebo to drug, we have been comparing “regular” placebos to “extra-strength” placebos.

Perhaps I’m sensitive because a friend of mine disappeared this way for a couple of years:

… One well-respected researcher, Nancy Andreasen, and her colleagues published evidence that the use of antipsychotic drugs is associated with shrinkage of the brain, and that the effect is directly related to the dose and duration of treatment. As Andreasen explained to The New York Times, “The prefrontal cortex doesn’t get the input it needs and is being shut down by drugs. That reduces the psychotic symptoms. It also causes the prefrontal cortex to slowly atrophy.”^*

Getting off the drugs is exceedingly difficult, according to Whitaker, because when they are withdrawn the compensatory mechanisms are left unopposed. When Celexa is withdrawn, serotonin levels fall precipitously because the presynaptic neurons are not releasing normal amounts and the postsynaptic neurons no longer have enough receptors for it…

Via Marginal Revolution and David Brooks.

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A Complement … I Think

In the mingle before I started class, a student described me as their second least confusing professor.

Chuckles ensued as we all tried to figure out what that meant.

The student clarified, and said that it’s a good thing because he’s taking 17 credits.

And his least confusing class is … institute.*

* For those not from the jello belt, institute is an LDS school located next to the campus of a conventional school. Many Mormon students engage in classes or activities at the institute, but freshmen are often taking extra institute classes to prepare for going on a mission when they turn 19. Most institute classes are doctrinal and not for college credit, but classes like comparative religion sometimes are.

4th Quarter Real GDP Growth

The advance announcement (the rough draft) of the real GDP growth rate for the 4th quarter of 2011 came out this morning, at an annualized rate of 2.8%.

How should we interpret this number?

How about with a letter grade?

If we assign letter grades “on a curve” this means assuming that they follow a normal distribution. When doing this, above the mean is a “B” in the 50th through 83rd percentiles, and below the mean in the 17th through 49th percentiles is a “C”, with other letter grades further out in the tails. Done this way, the range for a “C” is 1.6% to 3.5%, putting 4th quarter growth in the top half of the “C’s”.

But … you may have noticed that school is not like that in real life: grade inflation has made the idea that a “C” is “average” quaint at best, and as near as I can figure offensive to students with more self-esteem than ability.

Anyway, several years ago I obtained the grade distribution for all grades assigned at SUU for an entire semester. On this scale, the A’s extend much lower than the 84th percentile, and the B’s much lower than the 50th percentile. In fact, the range for a “B” for real GDP growth, if they are assigned in the same proportion as grades at SUU is 1.6% to 3.2%, making 4th quarter growth a high “B”.

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If You Tunneled Through the Earth, Where Would You End Up?

Unfortunately, for the lower 48, the boring answer is always in the middle of the Indian Ocean.

Via Newmark’s Door.

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“Markets Don’t Fail, They Fail to Exist”

Lynne Kiesling:

… Often when I encounter the “market failure” argument I make a quick riposte of “markets don’t fail, they fail to exist”, which is the Coase/transactions cost response. Transactions costs interfere with the ability of parties to find mutually beneficial trades, thus impeding optimal resource allocation and the creation of maximum gains from trade. Transactions costs lead to missing markets, as in the case of environmental pollution and other common-pool resource situations.

Via Cold Spring Shops.

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GoogleAds Fail

On this page about the foundering of the Costa Concordia that I posted last week, GoogleAds is running an ad for cruises on Holland America.

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A Local Malapropism

Regarding the landslide that closed a local highway:

If we have to wait until the 4th of July to get traffic through then that's half of our tourist season. It would be an economical disaster.

Isn’t an economical disaster the best kind to have??

BTW: The article had a great new picture:

Morgellons Is a Delusion

The conclusion of a new study from the CDC published in PLoS One is that Morgellons is a mental rather than a physical illness.

Morgellons is a condition in which sufferers claim itchy, non-human, fibers grow from their skin.

The CDC concluded that the fibers were neither the sign of an infectious agent or of a broader environmental poison. Instead, they seem to be clothing fibers that are merely stuck to the skin … basically lint.

It isn’t a very comforting diagnosis, but the CDC also reported that about half of the one in 25,000 people with Morgellons also had evidence of psychiatric illness.

I first posted about Morgellons 6 of 7 years ago … but I can’t put my hands on the URL at this time.

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What Did the Top 1% Major In?

Via Newmark’s Door:

What did the infamous top 1% major in?

According to the Census Bureau’s 2010 American Community Survey, the majors that give you the best chance of reaching the 1 percent are pre-med, economics, biochemistry, zoology and, yes, biology, in that order.

Not bad: I teach economics, and the vXwife teaches biology (and specializes in anatomy and physiology required for pre-meds).

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