#Fincabulary 28 – Gypsy Swap

Meaning – A gypsy swap is a unique method by which a company may raise capital without issuing debt or holding a secondary offering. In many respects, a gypsy swap is similar to a rights offering, except that the restricted party’s equity claim does not elapse and the swap instantly becomes dilutive.

The gypsy swap is broken into two parts:

1. An existing shareholder exchanges freely traded shares for restricted shares (shares restricted by time and/or price constraints) from the issuing company. In economic terms, the existing shareholder neither gains nor loses money from the transaction, although it may have tax consequences.

2. The issuing company then sells the existing shareholder’s freely traded shares to a new investor(s) at a price that may be higher or lower than the current market price. The issuing company now has additional capital and the new investor(s) has equity in the issuing company.

In almost every case, a gypsy swap is a last-ditch financing option because the new investor(s) almost always demands some combination of below-market value price or special consideration from the deal.

 

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Recently, Apple reported third consecutive quarterly decline. What do you think could be the reason for the same?

#Fincabulary 27 – Calamity Call

Meaning – A call feature of a Collateralized Mortgage Obligation (CMO) designed primarily to reduce the issuer’s reinvestment risk. If the cash flow generated by the underlying collateral is not enough to support the scheduled principal and interest payments, then the issuer is required to retire a portion of the CMO issue. It is also known as a “clean-up call.”

A Calamity Call is only one type of protection used in CMOs. Other types of protection include overcollateralization and pool insurance. In addition to protecting against reinvestment risk, Calamity Calls can be used to protect against default losses. They can be used in CMOs structured from second lien mortgages, where there is more limited protection against default losses. This is in contrast to overcollateralization which may be enough to provide sufficient protection to underlying pools of conventional fixed-rate mortgages.

#Fincabulary 26 – Barometer Stock

Meaning – A security whose performance is considered to be an indicator of the performance of its particular sector or industry or the market as a whole. It is also referred to as a bellwether stock.

Barometer stocks are usually large-cap equities or respected blue-chip stocks that signal a bullish market during periods of favorable performance and signal a bearish market during periods of unfavorable performance. Barometer stocks can have a large influence on the economic health of the country. Market analysts sometimes say something to the effect of, “What’s good for [barometer stock] is good for the country.”

#Fincabulary 25 – Fat Man Strategy

Meaning – A takeover defense tactic that involves the acquisition of a business or assets by a target company. The strategy is based on the premise that the bulked-up company – the “fat man” – would have reduced appeal to a hostile bidder, especially if the acquisition increases the acquirer’s debt load or decreases available cash.

This is a type of “kamikaze” defense tactic, which inflicts potentially irreversible damage on a company to prevent it from falling into hostile hands. However, it involves adding assets rather than divesting them as is the case with other kamikaze defense strategies. A disadvantage of this tactic is that acquisition candidates need to be identified well in advance of a hostile bid, otherwise there may be insufficient time to complete a fat man transaction.