Weekly Updates (3-18-2015)
- joshnosal
- Mar 19, 2015
- 3 min read
————— Summary —————
No End for Ex-Im Support of Coal Plants
Keeping CEOs' Appetite for Risk in Check
The Growing Use of Commercial Drones
Cybersecurity is the Place to Be
Currency Hedging is Necessary but Difficult for Global Funds
————— News —————
The pending expiration of the U.S.’s Export-Import Bank’s mandate on June 30 has complicated White House initiatives. According to White House spokeswoman Jennifer Friedman, the administration is “strongly committed to the long-term reauthorization of the Export-Import Bank,” but is also “committed to ending public financing for the most polluting power plants overseas, …” However, a bill was recently introduced as a bipartisan compromise that would keep the export credit agency alive but at the same time overturn the agency’s limits on coal-fired power plant projects. The bill is backed by four democrats and four republicans, and will have a huge impact on companies benefiting from Ex-Im financing such as Boeing Co. and Caterpillar Inc.
There are currently two new proposals seeking to keep management accountable for risk.
The first proposal is at Citigroup, where bank managers will be required to put a certain percentage of their wages into a general fund that will be tapped into to cover penalties for legal violations uncovered at the bank. Because these violations take years of investigation, the funds will remain available for 10 years before being returned to management. Although the proposal is non-binding, the SEC has required its inclusion in the 2015 shareholder proxy and it will be voted on at the April 28 meeting.
The second proposal includes an agreement to be signed by a corporation’s top executives, requiring them to pay back 25% of their earnings from the prior 3 years on the event of a significant corporate governance failure. The agreement would be in effect whether or not executives knew of the misdeeds, in the same way that executives take credit for growth they had little influence on. The author of this proposal, Greg Zipes, listed out nine possible failures that would trigger repayment of earnings in his article with the Michigan Law Journal.
The FAA has proposed rules that would lift current bans on most commercial drone use, granting more flexibility in drone use for companies that have received or are waiting to receive exemptions form the current ban on drone use. Industry lobbyists have criticized the current exemption process as being too slow, and suggest that rules lifting the ban on drone use would be much more effective than the current exemption path around the ban. Although it could take years for new rules to take affect, the FAA is making changes that will no longer require companies with exemptions to obtain new certificates for each new use. All of these changes will help “foster growth of an emerging sector of manufacturers and service providers built around drone technology.”
There is a growing list of cybersecurity firms that plan to go public in 2015, including Rapid7, LogRhythm, and Mimecast who provide risk assessment and monitoring software, network activity monitoring software, and email security. All three companies are planning on seeking valuations in excess of $1 billion with the help of Morgan Stanley, JPMorgan Chase, and Barclays. Both LogRhythm and Mimecast can be expected to IPO in the later half of the year. Investor interest has grown in the wake of the many recent hacker attacks that have prompted businesses to spend more on network security. As a result, share prices have risen considerably at firms like FireEye, Palo Alto Networks, and Qualys Inc. Yet, cybersecurity is not without risk. FireEye, primarily, has recorded considerable losses plunging its stock prices more than 70% in three months. Most of these losses can be chalked up to rapid expansion and capital structures stretched thin as companies seek to expand their market footprint. According to Venky Ganesan, managing director at Menlo Ventures, the “average corporate spending on cyber security will rise from about 0.25% of total revenue to as much as 2% in the coming years.”
Hedging against currencies in global funds allows investors to be pure stockpickers without the currency risk. Generally, funds will try and avoid investments in large U.S. companies to receive most of their revenue in Europe. On the flip side, European companies have become more attractive as the dollar’s value increases and spurs increases in EU exports. Nevertheless, hedging a currency can be very difficult. According to John Manley from Wells Fargo Fund, “when you hedge a currency you have to be right twice. You have to be right about the market, and right about the currency.” Currently, there is no way of tracking if a global fund hedges its currency exposure.
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