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Whats Not to Like?
Given the current fixed-income environment, you dont have to squint too hard to see what investors have found attractive about these funds. For starters, their robust yields are compelling, particularly given the anemic payouts from competing investments. The average bank-loan fund has a 12-month trailing yield of about 5%, more than 1.5 percentage points higher than the typical intermediate-term bond fund. Although SEC yields arent available for every fund on Morningstar.com, most bank-loan funds SEC yields are still more than 4%. (SEC yield provides a more current snapshot of prevailing payouts than does trailing-12-month yield.)
Bank loans unique properties make them attractive for the interest-rate environment that could lie ahead, too. Bank-loan funds are composed of slices of loans made by banks, and the interest rates on these loans reset every 90 days, at an amount over LIBOR. Because their interest rates effectively reset to keep pace with the prevailing-yield environment, bank-loan funds arent vulnerable like other bond funds when interest rates trend higher; shareholders actually benefit. In rising-rate years such as 1994 and 1999, bank-loan funds gained an average of 7% and 6%, respectively.
By contrast, the typical intermediate-term offering lost more than 4% and 1.3% in those two years. For conventional bond funds, the availability of newly issued bonds with higher rates make the older, lower-yielding bonds in their portfolios less attractive; bank-loan funds dont face the same problems. Marta Norton, an investment manager with Morningstar Investment Services, also argues in this video that bank loans are decent hedges against inflation; after all, it stands to reason that in periods when inflation is headed up, so are interest rates, and those higher rates flow through to bank-loan shareholders.
In addition to the loans appeal in a rising-interest-rate environment, Morningstar senior analyst Sarah Bush believes that the fundamentals of bank loans look solid. She points out that valuations look pretty reasonable right now, noting that the typical loan in the Standard amp; Poors/LSTA US Leveraged Loan 100 Index is trading at 91, down from 96 in the spring of 2011. That leaves room for price appreciation, which, combined with loans decent yields, could add up to an attractive total-return picture.
Of course, a weak economic environment is the Achilles heel of bank loans because businesses can struggle and defaults can increase. However, Bush points out that defaults remain low by historical standards, and US companies have been building cash and fortifying their balance sheets in the wake of the credit crisis. Floating-rate loans are also higher in the capital structure than high-yield bonds, leaving their owners in a better position if defaults do indeed pick up.
A Long Way From Cash or Even High-Quality Bonds
All the same, theres a risk that investors are overestimating bank loans defensive properties. Yes, theyll likely hold up better than most bond types in a rising-interest-rate environment; they even have a very good shot at delivering positive returns under such a scenario. And because current yields are higher than those of most other bond types, you get paid handsomely in the meantime.
At the same time, its a mistake to be lulled into a false sense of security about the asset class. Bush notes that the danger is that investors will look at the floating rates as giving protection against a rise in interest rates and ignore the credit and liquidity risk. After all, bank loans with floating rates are generally issued to companies with less-than-perfect credit pictures; many such firms also operate in cyclical industries. In market shocks and flights to quality characterized by worries about the economys strength, bank loans can and will suffer. In the three-month period from September through November 2008, the typical bank-loan fund lost one fourth of its value amid the financial crisis and forced selling by hedge fund managers who needed to raise cash to pay off departing shareholders.
That was a worst-case scenario, but other market shocks arent out of the question. During the worst of the eurozone crisis this past August, for example, the average bank-loan fund lost 4.4%, even as the typical intermediate-term fund actually gained money during that same period. The average standard deviation–a measure of volatility–for bank-loan funds is literally twice as high as is the case for intermediate-term bond funds during the past five- and 10-year periods, and it dwarfs the volatility level of the average short-term bond fund.
Thats not to say you shouldnt make room in your portfolio for bank loans at all; theres a lot to like about the asset class, particularly given what could lie ahead for fixed-income investors. It does indicate, however, that bank loans make sense as part of the aggressive kicker component of your portfolio rather than to meet short- or even intermediate-term liquidity needs. So if youre adding to bank loans, do so because your portfolio is light on credit-sensitive exposure (such as high-yield or multisector bond funds).
Its also worth noting that the category includes a broad gradation of risk levels, with some offerings placing a higher premium on the credit quality and liquidity of their holdings than others. Because investors typically have a better time sticking with more risk-conscious funds (and this is true not just in the bank-loan sector), our analysts tend to favor those offerings. Fidelity Advisor Floating Rate High Income , one of the groups most cautious options, is a favorite.
Cash Back mortgages give you anywhere from 1-7% of your mortgage in cash on closing. You can take that cash and immediately make an RRSP contribution with it.
RRSP loans are a little different. They’re basically just straight loans secured against your investments instead of your house.
Each has its relative benefits…
Cash Back Mortgage Advantages
Monthly payments are typically lower on the funds borrowed for your RRSP contribution (That’s because the amortization period of a mortgage is usually longer than an RRSP loan.)
Most, but not all, mortgages compound semi-annually. RRSP loans often compound monthly, which is slightly more costly (Albeit, the difference is far from enormous.)
RRSP Loan Advantages
You can sometimes borrow more for your RRSP with an RRSP loan than with a cash back mortgage, depending on the mortgage amount and lender.
Unlike a cash back mortgage, there is no clawback of cash to worry about (If you break a cash back mortgage early, you typically must pay back a pro rata portion of the cash you received. Beware that some lenders make you pay it all back, even if you’re just a few days until maturity.)
Another key differentiator between these two options is the interest rate.
Rates on RRSP loans currently range from roughly 3-7% depending on institution, loan size, qualifications, term, etc. That means you’ll pay roughly $200-$550 interest per year for every $10,000 borrowed.
Cash back interest rates are usually 0.40% to 2.00% more than a regular fixed mortgage. That translates to about 3.60% to 5.29% today. The actual rate depends on the mortgage term, lender and cash back amount, among other things.
Despite the higher-than-normal mortgage rate, people often forget that the effective rate of a cash back mortgage is substantially lower. That’s because the lender is handing you cash up front, which reduces your overall borrowing cost.
In fact, for large mortgage amounts and shorter terms, you’ll occasionally find effective rates that are actually lower than a regular mortgage.
Once you solidify your interest rate, you’ll need to determine your payback period. In other words, how long will it take you to repay the money borrowed for your RRSP contribution?
Key Point: RRSP loans are meant to be short-term. That can’t be stressed enough. Otherwise, the borrowing costs eat up the gains.
Even if you’ve used a cash back mortgage and amortized your RRSP contribution over 25 years, you absolutely and unequivocally need the discipline to pay back the RRSP portion quickly (usually within 1-3 years, depending on the rate, RRSP return, amount of tax refund, etc.).
With the interest rate and payback period determined, you can then compare the interest cost to your gain. That gain includes both the RRSP tax deduction and your projected investment growth. This, in part, will confirm if borrowing for your RRSP is worth it.
Assuming you do borrow to contribute, you can generally expect a tax refund. Use that refund wisely. Financial advisers often recommend one of three things:
Prepaying your RRSP loan with it (Doing so lowers your interest expense, which is not tax deductible)
Using it to pay off high-interest debt
Using it to make an RRSP contribution for the current year
Before we wrap things up, it’s worth mentioning one other alternative to a cash back mortgage: a regular refinance.
Rates on a regular refinance are generally (but not always) less than the effective rate of a cash back mortgage. But a refinance comes with issues of its own.
You will:
Need enough home equity to refinance.
Face default insurance premiums if your loan-to-value(LTV) is over 80% (85% LTV is the limit if you want the best rates.)
Pay a penalty if you have to break a closed mortgage early. (Mortgage penalties often ruin the math and make borrowing for an RRSP contribution uneconomical via a mortgage.)
Pay legal fees to refinance. (By comparison, legals are often paid by the lender when you “switch” into a cashback mortgage at maturity. Lenders occasionally cover legals on regular refinances as well. (Just watch out that they don’t charge you an offsetting rate premium in return.)
Whether RRSP borrowing (of any kind) is right for you depends on your tax bracket, contribution room, ability to handle more debt (even if short term), risk tolerance, time till retirement, and likely payback period, among other things. An independent financial advisor or accountant are good sources to help you sort it out.
Related RRSP Tools:
Tax Savings Calculator — By Province (Ernst amp; Young)
Genesys Said to Seek $600 Million in Loans for Permira Buyout January 10, 2012, 11:43 AM EST
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By Michael Amato
Jan. 9 (Bloomberg) — Genesys Telecommunications Laboratories Inc., a provider of call-center software, is seeking $600 million in loans to back its $1.5 billion buyout by Permira Advisers LLC, according to a person with knowledge of the transaction.
The financing will include a $550 million term loan due in seven years and a $50 million revolving line of credit maturing in five years, said the person, who declined to be identified because the terms are private.
Goldman Sachs Group Inc., Citigroup Inc., Royal Bank of Canada and Macquarie Group Ltd. are arranging the financing for the Daly City, California-based company and will host a lender meeting tomorrow at 10 a.m. in New York, the person said.
Permira Advisers, Technology Crossover Ventures and certain co-investors of the Permira funds are purchasing Genesys from Alcatel-Lucent, according to an Oct. 19 Permira statement. Alcatel-Lucent, France’s largest telecommunications equipment supplier, acquired Genesys in January 2010, according to data compiled by Bloomberg.
Matthieu Roussellier, a spokesman for Permira, declined to comment.
In a revolving credit facility, money can be borrowed again once it’s repaid; in a term loan, it can’t.
–Editors: Chapin Wright, John Parry
To contact the reporter on this story: Michael Amato in New York at Mamato3@bloomberg.net
To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net
ATLANTA, Jan. 9, 2012 /PRNewswire via COMTEX/ –
The U.S. Small Business Administration reminds Private Non-Profit Organizations (PNPs) in Tennessee that Feb. 9 is the deadline to submit Economic Injury Disaster Loan applications. The loans are available from the SBA because of the severe storms, tornadoes, high winds and flooding that occurred from April 19 to June 7, 2011.
Eligible non-critical PNPs located in Benton, Carroll, Crockett, Dyer, Gibson, Henderson, Henry, Houston, Lake, Lauderdale, Madison, Montgomery, Obion, Shelby and Stewart counties in Tennessee are eligible to apply to the SBA. Examples of eligible non-critical PNP organizations include, but are not limited to food kitchens, homeless shelters, museums, libraries, community centers and colleges.
The SBA offers Economic Injury Disaster Loans to help meet working capital needs such as ongoing operating expenses for eligible non-critical PNP organizations. This assistance is available regardless of whether the organization suffered any physical property damage. Loan amounts can be up to $2 million, and the interest rate is 3 percent with terms up to 30 years. The SBA sets loan amounts and terms based on each applicant’s financial condition.
To obtain disaster loan information and application forms, call the SBA’s Customer Service Center at 800-659-2955 (800-877-8339 for the deaf and hard-of-hearing) or send an email to disastercustomerservice@sba.gov. Applications can also be downloaded from
www.sba.gov . Completed applications should be mailed to: U.S. Small Business Administration, Processing and Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155.
PNPs affected by the disaster may also apply for disaster loans electronically from SBA’s website at
https://disasterloan.sba.gov/ela/ .
The filing deadline to return economic injury applications is February 9, 2012.
For more information about the SBA’s Disaster Loan Program, visit our website at
www.sba.gov .
Contact: Michael Lampton Phone: 404-331-0333
SOURCE U.S. Small Business Administration
Copyright (C) 2012 PR Newswire. All rights reserved
Thanks to the actions of the National Consumer Law Center, the IRS and various state attorneys general, high-cost refund anticipation loans may be on the way out.
These loans were first introduced in the 1980s with the advent of the electronic filing of income tax returns. RALs were collateralized by and repaid directly from the proceeds of a consumers tax refund from the IRS. Because RALs are usually made for a duration of about seven to 14 days (the difference between when the RAL is made and when it is repaid by deposit of the taxpayers refund), fees for these loans can translate into triple digit annual percentage rates.
Loans of this ilk confiscate hundreds of millions of dollars from consumers and the US Treasury. RALs target the working poor, especially those who qualify for the Earned Income Tax Credit, a refundable credit intended to boost low-wage workers out of poverty. The EITC is the largest federal anti-poverty program, providing nearly $50 billion to more than 24 million families in 2009.
TAKING THE PULSE: America’s businesses continued to help banks grow in the fourth quarter, but commercial loans are unlikely to even the impact from turbulent capital markets and sluggish consumer borrowing.
Those issues will particularly impact J.P. Morgan Chase & Co.
/quotes/zigman/272085/quotes/nls/jpmJPM -2.52%
— Chief Executive Jamie Dimon already said he expects another weak quarter in capital markets–Bank of America Corp.
/quotes/zigman/190927/quotes/nls/bacBAC -2.65%
and Citigroup Inc.
/quotes/zigman/5065548/quotes/nls/cC -2.72%
, which have sizable capital markets operations.
Investment-banking advisory revenue declined 40% from a strong quarter a year earlier, but trading revenue rose 15%, said JMP Securities analyst David Trone. However, compared to the sluggish third quarter, Trone expects revenue from trading to fall, while advisory and underwriting will be flat.
Consumer loans continue to shrink while net interest margins, essentially the profit margins in the lending business, are under pressure from low interest rates. Mortgage originations are expected to rise, but Dimon told investors last month that “mortgage banking revenue will be a little bit lower than people expect.”
However, demand for new business loans, particularly in the middle market, continued to be strong.
The Federal Reserve reported commercial and industrial loans at U.S. banks rose 11.8% in 2011 to almost $1.1 trillion, as of Dec. 28, which includes a 4.2% jump in the fourth quarter.
The Commerce Department said business inventories rose in November, the 25th gain in the last 26 months. The Institute for Supply Management said the manufacturing sector expanded in December for the 29th-consecutive month.
The economy “felt better to us than what you read about sometimes,” Wells Fargo Chief Financial Officer Timothy Sloan said in a recent interview.
J.P. Morgan -- Reports Jan. 13
Earnings estimate: Analysts expect earnings of 92 cents per share, according to Thomson Reuters, and revenue of $23.4 billion. A year earlier, the bank reported earnings of $1.12 a share and revenue of $26.7 billion.
Key issues: Investment banking is likely to be a blow to overall results as the business is the biggest money maker for the bank. Stifel Nicolaus analyst Christopher Mutascio said one big offset will come from a possible reduction to the reserve for losses from bad loans thanks to improving delinquencies. Dimon said last month that it would be "very, very hard" not to reduce reserves soon.
Citigroup -- Reports Jan. 17
Earnings estimate: Analyst expect earnings of 51 cents a share, and revenue of $18.6 billion. A year earlier, Citi earned 40 cents a share and reported revenue of $18.4 billion.
Key issues: Chief Executive Vikram Pandit already disclosed a slew of one-time charges tied to issues ranging from taxes in Japan to the value of Citi's own bonds, bringing earnings estimates down sharply even from Friday. Slow economic growth in the U.S. will be offset by faster growth in emerging markets, where Citi refocused its expansion under Pandit. That strategy will hold for now, though Wells Fargo Securities analyst Matthew Burnell has "broad concerns about a slowing of international economic growth" in 2013.
Wells Fargo -- Reports Jan. 17
Earnings estimates: Analysts expect earnings of 72 cents a share and revenue of $20 billion, compared to per-share earnings of 61 cents and revenue of $21.5 billion a year earlier.
Key issues: With a smaller capital markets business, the focus continue to be on Wells Fargo's loan growth. It hasn't disappointed in recent quarters. In addition, revenue benefits from Wells' strategy to sell more products to customers it got with the 2008 acquisition of Wachovia Corp. But the net interest margin will continue to decline, CFO Sloan said. If "margin compression is greater than we anticipate... then we would have to rethink our investment thesis," Stifel's Mutascio wrote.
Bank of America -- Reports Jan. 19
Earnings estimates: Analyst expect earnings of 20 cents a share and revenue of $23.8 billion, compared to per-share earnings of 4 cents and revenue of $22.4 billion a year earlier.
Key issues: Charges will continue to make Bank of America's quarter messy. This quarter, the bank sold another big chunk of China Construction Bank Corp.
/quotes/zigman/529424CICHY -0.14%
, closed on its sale of some Canadian credit-card operations and swapped preferred stock for new shares and debt. Those actions boosted capital, a focal point these days. But mortgage issues will remain the biggest question. Recently, demands from Fannie Mae
/quotes/zigman/226360FNMA 0.00%
and Freddie Mac
/quotes/zigman/226335FMCC +1.82%
to repurchase loans have picked up, spooking investors.
Goldman Sachs Group Inc. (GS) said US
and Asian lenders will boost their share of commodity trade
financing as European banks curb loans, making disruptions in
the markets unlikely while traders’ borrowing costs may rise.
Jeffrey Currie, head of commodities research, commented
today in an interview in London.
“Thus far there is not much evidence of significant market
disruptions due to a lack of trade credits in Asia and America.
The core of disruptions seems to be within the European Union.
The overall stock of trade credits is unlikely to change
significantly, only the ownership, as European banks exit these
businesses and sell them to the US or Asian buyers.
”Ultimately, after the transfers are completed, the
lasting impact is that it will likely cost more for commodity
operators to access this type of funding.”
On the impact of trade finance difficulties on different
markets:
”Commodities are being impacted equally by the trade
finance problems, but the price reactions have been different.
This is because size of the impact relative to the market is
different and the underlying fundamental stories are different.
”Oil has much tighter inventories and is a much larger
global market, so it’s not reacting to the same degree as the
smaller markets. Other markets, say copper or aluminum, were
much harder hit because they are smaller markets, more exposed
to Europe and they have higher inventory levels from which de-
stocking could occur.”
To contact the reporter on this story:
Maria Kolesnikova in London at
mkolesnikova@bloomberg.net
To contact the editor responsible for this story:
Claudia Carpenter at
ccarpenter2@bloomberg.net
(Updates with JPMorgan reserve-ratio cut forecast in third paragraph.)
Jan. 9 (Bloomberg) — Chinas December lending and money supply growth exceeded economists estimates, signaling monetary conditions may be easing as the nations central bank said it must be prepared for possible shocks from the US and Europe.
New loans totaled 640.5 billion yuan ($101 billion) for the month, exceeding the estimates of all 18 economists surveyed by Bloomberg. M2, a measure of money supply, rose 13.6 percent, compared with the 12.9 percent median of 18 estimates.
Peoples Bank of China Governor Zhou Xiaochuan said yesterday the nation must be ready to combat possible shocks from Europes debt crisis and an uncertain US economic outlook, echoing comments by Premier Wen Jiabao. The central bank will very likely follow up last months reduction in lenders reserve requirements with another cut this week, JPMorgan Chase amp; Co. said today.
This is better-than-expected monetary data, suggesting monetary conditions have started to ease, said Liu Li-Gang, a Hong Kong-based economist with Australia amp; New Zealand Banking Group Ltd., who previously worked at the World Bank. Liu said he expects that the central bank may cut the reserve requirement again before the Lunar New Year on Jan. 23. Such easing will help ensure a soft landing for the Chinese economy, he said.
The statement posted to the central banks website yesterday didnt contain a figure for Chinas foreign-exchange reserves, which are usually released with lending and money supply data issued at the end of each quarter.
External Shocks
Stocks in China rose. The Shanghai Composite Index was 1.5 percent higher at 10:53 am local time. The measure lost 1.6 percent last week.
The benchmark money-market rate had the biggest weekly decline since November last week as the central bank refrained from selling bills to help ease a cash shortage ahead of the week-long New Year public holiday. The seven-day repo rate rose 19 basis points to 4.50 percent as of 10 am in Shanghai.
The PBOC said Jan. 6 it will suspend debt sales ahead of the festival and buy securities from the market or financial institutions to boost liquidity if needed.
Zhou yesterday said in an interview with the official Xinhua News Agency that the global economy will face a string of difficulties in 2012 as a result of the European debt crisis, uncertainties in the US and slowing growth in emerging markets. China must be ready to pick appropriate policy instruments to combat external shocks, Zhou was cited as saying.
Relatively Difficult
Fighting inflation is not as urgent now as it was in early 2011, Xinhua cited Zhou as saying after a two-day meeting of financial regulators in Beijing. The National Financial Work meeting, which was attended by senior officials including Premier Wen, is held every five years to form development plans for the financial sector, Xinhua reported.
Wen last week pledged to fine tune monetary policy to preserve growth as business conditions in the first quarter may be relatively difficult. The nations export growth slowed in November to the weakest pace since 2009.
China is scheduled to release data for December exports, imports and trade balance tomorrow. Its also due to issue December inflation figures on Jan. 12 and data for annual 2011 and fourth-quarter economic growth on Jan. 17, according to the statistics bureau.
The central banks data yesterday showed that December money supply grew at the fastest pace since July. The 12.7 percent pace reported for November was the weakest since 2001.
Ease Liquidity
Lending in December was the highest monthly figure since April. The median estimate of 18 economists surveyed by Bloomberg was for 575 billion yuan of loans in the month.
