The FASB Proposal's Emphasis On How Companies Manage Financial Instruments Could Improve Financial Reporting
We greatly support the FASB's objective to provide financial statement users with more decision-useful information about a company's financial instruments, while concurrently simplifying the accounting for those instruments. The accounting treatment of financial instruments should reflect the fundamental business and economic purpose for transacting those instruments, and provide useful information on the amounts likely to be realized or paid. The optimal depiction of financial instruments should consider a company's asset-liability management model and its business strategy. In some cases, fair value accounting would best achieve those objectives; in other cases, amortized cost treatment may provide a better representation. This Proposed Update, expected to create a single, comprehensive standard for measuring financial instruments such as loans, securities, hybrids, and deposits within its scope, could be a significant step forward in simplifying and improving the quality of financial reporting.
What goes up must come down. That's how it feels when we look at the housing starts data, which plunged by 16.5% in April after reaching a five-year high of 1.021 million units in March. Although this was weaker than expectations, the 14.3% bounce in permits to another five-year high suggests more building over the next few months and good news for GDP growth. The housing starts data disappointed in April, falling by 16.5% to 853,000 units. It was weaker than consensus expectations for 970,000 units started, though it came after March starts surged to levels not seen in five years. Given the large jump in March, multifamily starts plunged by 37.5% in April. However, single-family starts also declined, by 2.1% over March. The two months of declines come after single family reached a new four-year high in February.
In the 500 years after Johannes Gutenberg invented the printing press in 1450, change came slowly to the world of information technology. But no more. Today, each new technology wipes out the value of innovations that were only a few years old. Cloud computing threatens to disrupt the disk storage industry, streaming is bullying broadcast television and DVDs, and handhelds are cannibalizing PC sales. Does this wave of rapid technological innovation point to a riskier sector? The industry's credit risk today is more likely vulnerable to general economic pressures than to innovation.
Innovation and securitization go hand in hand. Indeed, securitization has evolved to its current state because it readily adapts to new asset types and structures. Alongside the mainstays of U.S. securitization asset classes--mortgages, consumer loans, and collateralized loan obligations (CLOs)--a group of smaller, less-prevalent, and often novel asset classes have thrived in the securitization market since the mid-1990s. We refer to these as nontraditional asset securitizations; other market participants also refer to them as esoteric assets or new assets. The assets backing these transactions often come from business sectors such as timeshare loans, shipping container leases, and structured settlements, which are narrow and small compared with the U.S. housing or auto markets. Investors appreciate the risk diversification that these assets typically provide and the securities’ relatively high yields.
The outlook revision reflects that the company's financial risk profile has weakened as a result of continued tepid operating performance for the 12 months ended March 30, 2013, as average debt levels remained relatively stable. The company's leverage for the 12 months ended March 30, 2013, increased to about 4x, compared with 2.8x one year ago, and is on the high end of our indicative ratio of debt-to-EBITDA leverage of 3x to 4x for a "significant" financial risk profile. In particular, the company's operating performance for the recent quarter was hurt by a late start to the spring lawn and garden season, due to weather conditions. Credit metrics could remain weak for the current rating if the company does not recapture lost sales during the remainder of the lawn and garden season.
The decline in comparable store sales of 16.6%, substantial margin erosion due to the increase in clearance merchandise, and cash burn of about $959 million was in line with our expectations of a weak first quarter. In addition, the capital raising activities undertaken by J.C. Penney in the first quarter, including the $850 million draw down under the revolving credit facility and $1.75 billion term loan, were also expected. We believe there will be further meaningful changes over the next few months as the company rebalances merchandise among its new shops, private label, and national brands. We expect the re-introduction of promotions and couponing will help drive traffic over the next few quarters.
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