Equities markets

Private equity funds are attracted to the chemical industry for the same reasons as they like any sector - they believe they can generate good returns. The investment opportunities are driven by the industry s structural challenges and evolution. Therefore, continuous analysis of equities markets, consolidation trends, and related M A activity is essential. 

Global M A activity in the chemical industry peaked during 1998 and 1999 at about EUR 100 billion p.a., reflecting the equity markets support of such transactions. The market s focus on cost restructuring later led to a fall in M A to an annual volume of about EUR 15-25 billion. Recent industrial buyer-driven transactions in chemicals include Lubrizol s acquisition of Noveon in June 2004, Cytec s acquisition of Surface Specialties from UCB in early 2005, and Albemarle s acquisition of Akzo Refinery Catalysts in August 2004. 

The chemical industry has the potential for substantial further consolidation over the next few years. The precise timing will be influenced by the equity market cycles and general M A activity. However, as in the past and in other industry sectors, consolidation will provide investment opportunities for financial sponsors. 

Of the ten biggest European chemical LBOs since 1999, one was a full realization (100percent sale), three were partial realizations (partial sale during IPO and/or recapitalization), one was a credit default, and five are still fully invested. Exit opportunities were limited until 2004 due to the equity market dynamics in Europe and the USA. 

Financial markets value companies. The cycle of equity markets measured as a multiple of the current EBITDA performance of a company is important, as it influences the value and the timing of exits for financial sponsors. The availability of debt markets is equally important because LBOs require sophisticated debt financing arrangements. Conditions in both equity and debt markets have an impact on private equity investments. 

Beyond the capital market analysis, a financial sponsor needs to judge the sustainable value of a business over the medium to long term. This needs to be adaptable, as equity markets may not be available for IPOs, equity increases, or larger acquisitions. From the financial sponsor s viewpoint this means that the private equity fund has limited exit opportunities during such periods. 

Another characteristic of international equity markets, especially for chemical companies, is that valuations on US markets are high in by comparison with those on European markets (Fig. 31.3). US enterprise valuations are at least 1.7... 

The broad equity market, as measured by the Standard Poor s 500 Index (S P 500), experienced a historical high in March of 2000. By February of 2003, it had declined approximately 45 percent. However,... 

The New York Stock Exchange (NYSE), the world s leading equities market, revised its Listing Standards in 2002. The new standards put listed companies to a much higher requirement of corporate governance and disclosure practices. 

Throughout the years the World Health Organization has taken the position that the question as to how to provide access to medicines while containing their costs must be viewed as an integral part of longterm pharmaceutical policies. More broadly it is a part of overall health care policy and, more broadly still, a component of the entire economic and social policy of a country. The problem of cost containment of pharmaceuticals cannot be viewed separately from such issues as equity, market structure or the quality of therapeutic care. 

The before-tax rate of return required to support the firm s equity structure would reflect both the risk attributable to equity instruments and the volatihty associate with the firm s stock price relative to the equity market average. The rate of return, required to support the equity portion of the firm s capital structure is... 

R = risk attributable to the general equity market t = effective tax rate... 

The value of the risk-free rate of return, r, can be estimated as being equal to the interest rate paid on U.S. Treasury Bills or other guaranteed savings instruments, approximately 6% in mid-20(X). The interest rate equivalent to the general equity market, was found to be approximately 9% by Fisher and Lorie (1968). Over the past 30 years this figure has risen to 11%. The effective tax rate, t, can... 

In other words, assuming a complete market stochastic volatility model implies that the short rate is modeled directly, while the traded asset (bond) has to be derived. Therefore, only the direct modeling of the bond price dynamics, together with stochastic volatility leads to an incomplete market model analog to the stochastic volatility models of equity markets". ... 

Note that the impact of this correlation effect is not in contradiction to the results found by Bakshi, Cao and Chen [5], Nandi [62] and Schobel and Zhu [69] for equity options. They found higher option prices given positive correlations and vice verca. On the other hand, we have a risk-neutral bond price process, where the source of uncertainty is negatively assigned (see e.g. (7.2)). Thus, assuming a USV bond model with negative correlated Brownian motions is the fixed income market analog of a stochastic volatility equity market model, with positive correlated sources of uncertainty. ... 

The increasing internationatization of the European financial markets, a broader investor base, and the rising equity markets in the late 1990s have led more people in the European countries to deal with the equity markets. Shareholder value became the buzzword and got access to everyday language. 

There is a wide range of uses to which repo might be put. Structured transactions that are very similar to repo include total return swaps, and other structured repo trades include floating-rate repo that contains an option to switch to a fixed rate at a later date. In the equity market repo is often conducted in a basket of stocks, which might be constituent stocks in an index such as the FTSEIOO or CAC40 or user-specified bas-... 

Stock lending is not a sale and repurchase in the conventional sense but is used by banks and securities houses to cover short positions in securities put on as part of market-making or proprietary trading activity. In some markets (for example, the Japanese equity market) regulations require a counterparty to have arranged stock lending before putting on the short trade. 

Declines in equity market values tend to place upward pressure on swap spreads. A decline in equity market values deteriorates the overall credit health of the banking sector, because it reduces collateral value in the entire system. 

The swap yield curve is correlated with the Treasury yield curves, but this correlation has decreased from 2001 to 2002. This may be explained by the increase in the investors risk aversion as continuing poor performance of equity markets in 2002 has triggered a search for liquidity and quality. The correlation with the Treasury yield curves is high for the first factor (see Exhibit 24.4), but weak for the second and third factors (see Exhibits 24.5 and 24.6). 

Tracking error calculations have a relatively long history in the equity markets of measuring the relative risk of a portfolio against an index. The popularity of this methodology in equities has led many fixed-income managers to adopt the same approach, but we believe it is not as appropriate for the fixed-income markets. 

The belief that markets will change in structure and composition over time is almost axiomatic among market participants. These changes are often more pronounced in fixed-income market than in the equities market, primarily due to the fact that the number of securities in fixed income is much larger, and the churn associated with new issues and bonds maturing is significant. 

It goes without saying that an index is only as good as the data—both prices and static information—that is used to calculate it. Even a well-constituted and well-calculated index is unlikely to represent the moves of the market if it uses distorted prices. Unlike the equity market, where price transparency is high, there have historically been major impediments for getting true market prices for bonds and other OTC instruments. 

Unlike in the equity market, where there are several widely accepted benchmarks, the European credit market does not yet possess a bench-... 

Convertible and exchangeable issuance has risen recently driven by several factors from equity market volatility to German tax reform. Stripped convertibles are convertible bonds where the equity option has been stripped out and represents pure credit, callable after a specified date. 

The media report the bond yield level because it is so important to the country s economy—as important as the level of the equity market and more relevant as an indicator of the health and direction of the economy. Because of the size and crucial nature of the debt markets, a large number of market participants, ranging from bond issuers to bond investors and associated intermediaries, are interested in analyzing them. This chapter introduces the building blocks of the analysis. 

A rise in interest rates increases the value of most call options. For stock options, this is because the equity markets view a rate increase as a sign that share price growth will accelerate. Generally, the relationship is the... 

Longin F, Solnik B (2001) Extreme correlation of international equity markets. J Finance... 

A rise in interest rates increases the value of most call options. For stock options, this is because the equity markets view a rate increase as a sign that share price growth will accelerate. Generally, the relationship is the same for bond options. Not always, however, since in the bond market, rising rates tend to depress prices, because they lower the present value of future cash flows. A rise in interest rates has the opposite effect on put options, causing their value to drop. The risk-free interest rate applicable to a bond option with a term to expiry of, say, three months is a three-month government rate—commonly the government bond repo rate for bond options, usually the T-bill rate for other types. 

U.S. investors have been very badly burned by the stock market in recent years (Internet and technology-related stocks weren t the only perpetrators) confidence in the equities markets was eroded, but—as with any rebuilding after a long bull run and then a steep decline—will be restored extremely slowly. 

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