Matthias Meitner

On the pricing of GDP-linked financial products

This paper discusses the pricing of GDP-linked financial products. GDP-linked bonds for instance are bonds which pay a coupon tied to the changes of GDP (Gross Domestic Product): if economic growth is low, the coupon decreases while a strong economic rise leads to a higher coupon. Therefore these innovative financial instruments are able to translate changes in the business cycle and long-term prospects into changes in the issuing countrys debt service, taking into account GDP development. Against the background of a growing interest in macro-indexed financial instruments and Argentinas very recent offer to issue GDP-linked bonds, different characteristics of GDP-linked bonds are briefly discussed and a simple pricing approach for GDP-linked bonds and European options on GDP development is provided assuming a Black–Scholes type environment.

Private Equity for Distressed Companies in Germany

This article summarizes the characteristics and trends of private equity investing in troubled companies in Germany. The analysis shows a growing importance of distressed companies for private equity firms, mainly for traditional buyout funds. However, investment behavior seems to be increasingly risk averse since turnaround and buyout investors prefer a relatively stable economy, early stages of distress, qualified management, and better potential exit possibilities. Another finding is that restructuring strategies of investors in the fields of organization/management, products/services, and human resources do not depend on the causes of distress.

Gpd-Linked Bonds as a Financing Tool for Developing Countries and Emerging Markets

The paper examines the applicability of GDP-linked bonds for the financing of developing countries and emerging markets. GDP-linked bonds are bonds of which the coupon and/or redemption payments are tied to the GDP of the issuing country. The study encompasses a detailed empirical analysis of their pricing behaviour, the pricing sensitivities to changes in GDP, and of their behaviour in a portfolio context is conducted. A survey amongst potential investors as well as issuing-side capital market participants assesses the prospects of success of this new type of bond. Finally, the usefulness of a partial public guarantee of payments is examined. The paper provides evidence under which circumstances, for which investors and for which countries GDP-linked bonds might be an appropriate investment vehicle.

Option-Style Multi-Factor Comparable Company Valuation for Practical Use

Classical single-factor comparable company valuation (CCV) like e.g. valuation using the price-earnings ratio is associated with several shortcomings. The two most important are the non-applicability of negative values in the basis of reference and the high requirements to the qualitative characteristics of comparable companies. This paper develops a multi-factor CCV model based on substance and performance related accounting attributes that largely overcomes these drawbacks. Additionally, the model allows to depict expected future earnings development economically sounder than single-factor models. Furthermore, by accounting for managements option to adapt firm assets differently or to liquidate the company the model can conclusively assign positive stock prices to currently negatively performing companies.

DCF-Valuations of Companies in Crisis: Distress-Related Leverage, Identification of Risk Positions, Discounting Techniques, and “Beta Flips”

Abstract From the viewpoint of a well-diversified investor, an equity investment in an operationally distressed company resembles an equity investment in a financially levered company. However, the risk characteristics of the “virtual debt” in a distressed company are not necessarily identical to those of typical financial debt, which makes investments into distressed companies unique. In this paper, we show that risk-adjusted discount rates of distressed companies can differ quite significantly from those of healthy companies. We further illustrate how to determine such discount rates and how to account for these findings in practical discounted cash flow valuation cases.

Beware of the Beta Flip! Pitfalls in DCF-Valuations of Temporarily and Sustainably Distressed Companies and How to Avoid Them

This paper is a guide on how to perform DCF valuations of distressed companies from the viewpoint of a well diversified investor. It is shown that companies with temporarily negative cash flows typically only require minor (though not negligible) adjustments to the discount rate. Contrary to that, for companies that persistently show an operating underperformance, discount rates look quite different than for - apart from their performance - comparable companies. It is further outlined that even companies with sustainably positive but relatively low cash flows can have a negative business value. Finally, we show how to account for all this in practical valuations by adjusting beta factors that are drawn from comparable companies. The findings of this paper challenge the conventional equity valuation practice and the common academic views on this topic. In the light of the current recessionary economic environment this paper is of high practical relevance for both academics as well as accountants and public equity analysts.