Short Selling

Alan Kohler is one of my favorite Aussie finance commentators. Unfortunately, Business Spectator, where he writes regular columns, is available only through an email list and not through an rss feed. Today he has an interesting column on Short Selling.

Link Fest

Several interesting entries have flowed through my Google Reader account in the past few days. In no particular order:

• Is this a good time to invest? Should you be making extra year-end superannuation contributions given the current financial climate. Robin Bowerman at news.com's Smart Investing blog comments.
• Felix Salmon over at Portfolio.com asks "Why do Investors Pay Fund-of-Funds managers?" This question is particularly interesting in light of the paper I recently found on SSRN: Wolf in Sheep's Clothing: The Active Investment Strategies Behind Index Performance recently published in European Financial Management.
• And there are conflicting opinions about the attractiveness of Wesfarmer's rights issue. The Australian came out early in favor of the company, while Merrill Lynch recommends against investing.
• In The Australian Michael Sainsbury wrote an analysis piece earlier this week that discusses the relative cheapness of equity in the current financial environment. This has major implications for capital structure decisions being made currently (as at Wesfarmers). Another example of equity raising is over at the Bank of Scotland.
  

Debt and Corporate Control

Robert Gottliebson has an interesting article over at Business Spectator about Centro. For those of you who haven't been following it, Centro is a high profile Australian casualty of the US credit crisis. Centro Properties (ASX:CNP) manages retail properties in Australia and the US. The properties themselves are owned by various trusts, the largest of which is Centro Retail Trust (ASX:CER). In December it became clear that Centro was going to have trouble re-financing a large portion of its debt, and the price plummeted. Clearly the underlying assets (management contracts for CNP and real estate for CER) have not dropped nearly as much in value as the share prices have. Gottliebson points out that the way the debt is structured (unsecured loans to CNP) makes it difficult for the banks to foreclose because CNP's management contracts are written to require shareholder approval in the event of a change in control. The banks will collect much more if they work with Centro to re-finance the debt rather than force Centro into administration.

For my students, this is a good illustration of the effects of debt on corporate control, and how clever structuring can change the usual dynamics between debtholders and shareholders.

(Disclosure: the author has a small financial interest in CER)

Financial Mayhem

I don't know if you've been following the Opes Prime saga, but I think it points out some weaknesses in the current Australian financial system. Alan Kohler, over at Business Spectator has been following this closely, and I recommend his columns. In particular this one about ANZ and how it ended up with more than 20% of several small caps. Students in my corporate finance class (last semester or next semester) will note that a 20% interest requires a shareholder to make a takeover bid under Australian securities law. Obviously, ANZ wasn't considering this when it took title to securities under lending agreements. Another important point for future investors is the importance of reading the actual document you are signing. It appears that many Opes Prime customers did not realise that they were signing over beneficial ownership of their shares rather than just pledging the shares as collateral. While there may be a case for arguing that the disclosures made by Opes Prime brokers to customers did not properly disclose the lending arrangements, prevention is always the best cure.