Acquisition & leveraged finance

Ways of financing corporate transactions by using own and outside capital. Lead to alterations of ownership.

Asset class

Category or class applied to characterize assets. Such categories are broadly defined and include shares, fixed-interest securities and real estate.

Asset management

Supplied to such clients as companies, banks, insurers, pension funds or private investors on the national and international levels, such services entail primarily the fiducial management of funds and portfolios comprised of shares, bonds and debentures, cash and real estate.

Basel II

“Basel I” refers to regulatory standards promulgated in 1988 and establishing, in a first, the capital backing requisite for transactions undertaken by banks (→ BIS). The revision of these regulations by the Basel Committee has yielded a new set of regulations, which is generally referred to as “Basel II”. The new set replaces the lump sum allotment of backing to transactions with a mechanism linking the amounts of capital backing and the extant risk to which the bank is exposed. Primarily used for this purpose are the ratings accorded to the loan recipient by an external agency or by the bank itself.  Basel II also establishes new and more precise ways of evaluating the collateral supplied to the loan recipient. The new rules also stipulate that operational risks to which banks are exposed have to be accompanied by the provision of capital backing.

BIS

The Bank for International Settlements (BIS) is headquartered in Basel. Its primary responsibilities are the supervision of transnational transactions and the formulation of internationally-applicable capital backing requirements.

Bonds

Term referring to both fixed-interest securities and debt obligations.

Capital increase

A measure undertaken by a company to increase its amount of own capital. There are various kinds of capital increases. Shareholders are normally given the option of exercising their rights of procurement of → new shares to maintain their relative stakes of the company's capital stock. For it to be enacted, three quarters of the shareholders attending the AGM have to vote for an “ordinary capital increase”. The company's executive board can also exercise its option of securing approval from the AGM for a capital increase to be undertaken some time during the next five years (“approved capital increase”).

CEE

CEE = Central and Eastern Europe

CFD – Contract of difference

A CFD is a contract whose value is derived from alterations in the value of an asset--a stock or an index--during the period of agreement. CFDs are thus not informed by the underlying value of the asset. Such contracts of difference thus precisely mirror movements on securities exchanges and are, for that reason, easy to understand. These contracts provide investors with a way of 'betting' on both kinds of stock movements (rises and falls).

Core capital allocation

Allocation of core capital to individual segments (such as corporate sectors).

Corporate finance

Refers to financing secured from both own and outside sources. The term thus applies to project-related and → Acquisition & Leveraged Finance, and to goings public and → Mergers & Acquisitions.

Corporate governance

This term refers to the set of regulations and rules governing the supervision and management of companies. The implementation of and adherence to such regulations make corporate operations easy to understand, thus enhancing outsider trust in the company management's acting in a way demonstrably sustaining and increasing corporate value. In use in Germany is the code formulated and updated on a regular basis by the country's Corporate Governance Commission.

Cost-income ratio

Ratio of expenditures for administration and the sum of income from interest, brokerage, trading and the balance of other operating results. A low cost-income ratio indicates a high level of productivity.

Coverage of securities

Such coverage is provided by analysts tracking and evaluating individual securities and the companies and institutes issuing them.

Credit derivatives

Derivative financial instruments enabling a participant in a transaction (such as the seller of risks or the secured party) to transfer the credit-related risk arising from a receivable or a security to another participant (such as the purchaser of risk or the securing party). Levied in the process is a premium. The purchaser of risk thus assumes the credit-related risk borne by the receivable or by the security, and does so without actually having to purchase it.

Credit risk

Loss of value possibly arising from customer default or deterioration of creditworthiness.

Cross-selling

Involves supplying consulting services designed to get customers interested in purchasing other corporate products.

Derivatives

Financial instruments derived from investment vehicles traded on spot markets (such as shares, bonds, foreign exchange). The value of a derivative is largely determined by the price, change thereof and expectation there for of the financial instrument underlying it.

Dividend

Portion of the company's profits disbursed to its shareholders. This payout is divided among and according to the company's shares. Along with the share's possible appreciation, the dividend is the source of its yield. Companies are not obliged to pay out dividends. Some companies--Microsoft is one of them--refrain, as a matter of corporate policy, from doing so, preferring instead to devote profits to investments in assets and innovations promising to secure corporate success and thus cause the company's stock to appreciate.

Equity according to BIS

(→ BIS) The recommendations formulated in July 1988 by the Basel Committee for Banking Supervision govern the amount of equity required to be maintained by banks. Such funds are comprised of liable equity capital and Tier III funds. The former is comprised of the core capital (itself primarily made up of subscribed capital and reserves) and of Tier II capital (participatory rights capital, subordinated term debt, provident reserves constituted according to §340f of Germany's Commercial Code, and revaluation reserves taking the form of securities and real estate).

ETC

Exchange Traded Commodities (ETCs) are bearer bonds which are traded on exchanges in the same way as → ETFs, and which involve commodities.

ETF

Exchange Traded Funds (ETFs) are funds which are directly bought and sold on stock exchanges without incurring any asset-based fees. To be paid are ordering fees and the security's price. ETFs feature easy-to-use and understand structures. They precisely depict such stock indexes as the DAX or the pan-European EuroStoxx. After having been constituted, ETFs are generally not proactively managed. Their term is not preset. Although relatively new in Europe, ETFs are rapidly gaining in popularity.

Euribor

European Interbank Offered Rate. This is the rate of interest levied among European banks trading deposits bearing a preset term of one week or of between one and twelve months. The Euribor is the reference rate which is the most widely used for floating bonds denominated in euros.

Exposure

Exposure refers to the amount expected to be borne by a bank facing the delinquency of a loan recipient. The exposure is proportionately comprised of freely-available outside lines and of certain products.

Fast exit option

The executive board of Deutsche Börse AG convenes once a year (at its statutory meeting of adjustment) to determine the composition of the DAX. Bases for these decisions are the proposals formulated by the company’s dedicated working circle, which uses two criteria in evaluating a company's worthiness for being part of this index. One is the so-called book of commissions turnover (“Orderbuchumsatz”) achieved by the shares traded on the Frankfurt Stock Exchange and via its Xetra electronic system. The other criterion is the company's market capitalization. This is determined to be equivalent to the capital circulating among the investing public. A ranking of 41st or higher in either these criteria as of September's statutory meeting of adjustment suffices to remove a company from inclusion in the DAX. The stock's being replaced in the index depends on there being a company which has registered 35th or better rankings in both criteria: book of commissions turnover and market capitalization. Via the “fast exit option”, Deutsche Börse is also entitled to remove companies from the DAX on such other days as the third Friday of the last month (March, June, September, December) in a quarter. This option can be exercised in those cases in which the company being replaced has rankings of 46th or worse in either of the above criteria, and in which a substitute is available which has placed 35th or better in both criteria.

Funds

Germany's legal codes define investment funds to be “special assets” managed by an investment trust. The class patronized by small-class investors is comprised of funds open to the general public. Such funds enable investors to realize their objectives of consigning their funds to a large number of shares or other securities. Such funds thus offer investors not possessing great amounts of capital a way of achieving this sought-after diversification. The funds gather money from a large number of investors, and then invest the proceeds in a great variety of vehicles. By doing such, they reduce the risk associated with investing in securities. Funds thus offer the ideal way of leveraging a relatively small amount of capital into a broad selection of investments. The funds show a great diversity of investment specialization: in shares, bonds and debentures, indexes, money markets, real estate, and even in other funds (fund of funds). A fund's total value is determined by that of the items comprising its portfolio. To find out a fund's current value, consult with the issuing party or with the Munich Stock Exchange, which provides realtime and binding quotes of purchase and sale during the entire trading day for more than 3,800 funds.

Goodwill

The difference between the amount which a purchaser is prepared to pay for a company and the balance of the company's individual assets and liabilities (asset value). The size of this difference is determined by the expectations of future earnings (earnings value).

Hybrid capital transactions (Hybrid capital)

Issues taking the form of assets contributed by silent partners or of preference shares whose emissions involves special purpose entities maintained by the group. Such issues are regarded by authorities supervising banks as being core capital.

Income retention

Refers to a company's plowing its profits back into financing its operations.

Index

Such “barometers” depict the weighted movement of a basket of securities. The most important index of stocks in Germany is the DAX, which comprises the performance of the stocks of the 30 largest joint stock companies headquartered in Germany and traded on exchanges. Inclusion is determined by the company's market capitalization, which is the stock's quote times the number of shares issued, and by its stock's daily turnover (both of sales and purchases) on exchanges. Prime among the international-level indexes is the EuroStoxx 50, which is comprised of the 50 largest (in terms of capital) companies in Europe; as well as the USA's Dow Jones Industrial Index and the NASDAQ 100. Predominating in the latter are technology companies. A large number of derivatives, certificates and funds mirror indexes. In most cases, its incorporation into an index leads to the stock's rising. This rise is caused by the propensity among fund managers and other investors to purchase all shares comprising an index.

International Accounting Standards (IAS)

Enacted by the IASC (International Accounting Standards Committee), an international body of experts stemming from national organizations and charged with resolving accounting issues, the IAS have been created to ensure the international-level uniformity, accountability and transparency of accounting practices.

International Financial Reporting Standards (IFRS)

The IFRS include the previously-enacted International Accounting Standards (→ IAS), as well as the interpretations issued by the Standing Interpretations Committee, and those standards and interpretations to be issued by the IASB in the years to come.

Investor Relations (IR)

This corporate department is charged with cultivating and maintaining relationships with shareholders, analysts and other players on capital markets by providing them with information on strategies, on key financial indicators and on the central →Value Drivers boosting corporate worth.

IPO (Initial Public Offering)

IPO refers to the administrative procedures governing the initial issuing of shares on a primary exchange. An IPO generally involves securing the admission for and listing of a company's joint stock and shares on an exchange.

Issuing

Refers generally to that of securities. This can be done directly (proprietary issuing) or by such outside parties as banks (outside issuing). Banks can do such on a per-commission basis. In such transactions, the bank acts on behalf of the issuing party and is paid commission on sales of issues. Banks can also purchase the securities at a preset price, to then offer them at a higher one to outside investors (placement).

Jumbo mortgage bonds

Mortgage bonds with an issuing volume of more than €500 million and used to refinance municipal (public sector mortgage bonds) or real estate loans.

Lead broker

These brokers are responsible for achieving the best possible quotes for and the largest possible volume of trading on exchanges for the securities entrusted to them. This day-to-day optimization of stock quotes by the lead brokers is monitored by the body supervising the trading on the respective exchange. The lead broker records each security and all orders (both sales and purchases) in his or her electronic order book. Such brokers are employed by such securities brokerages as Germany's Baader Bank AG and mwb fairtrade Wertpapierhandelsbank AG.

Leveraged buyout

This form of corporate takeover can be undertaken by in-company or external investors. Should managers conduct the takeover, the takeover is referred to as either→ management buy in or → management buyout. A relatively small amount of own funds is used to take over the company, with the preponderance of capital stemming from loans provided by banks or from the issuing of bonds.

Limit order

Predetermined upper and lower limits for the prices of securities to be bought or sold on exchanges. In addition to the quotes, the limits can also apply to the time of transaction. A “stop buy limit” refers to a limit placed upon purchasing; a “stop loss” to one triggering the sale of a security.

Management buy-in

The takeover of a company by outside management.

Management buyout

The takeover of a company by its management.

Market risk position

Principle 1 stipulates that such positions are comprised of the risks associated with foreign exchange, commodities and options, as well as those found in the trading ledger. The latter include risks arising from rates of interest and stock quotes, and from → credit risks.

Market techniques

Method used to predict or explain movements of stocks and other securities. The method takes into account all important corporate data, the stock's performance and that of the sector as a whole, as well as psychological factors.

Mergers & acquisitions (M&A)

The arranging of mergers among and of purchases of companies or parts thereof, plus the provision of related consulting services to either purchasers or sellers.

Mezzanine loans

A financing instrument which is subordinate to bank loans and which is primarily used as a component of the financing required in leveraged buyouts. The subordinate nature of this instrument imparts to its supplier a higher level of risk. This is generally compensated for by supplying a higher rate of interest and an option to acquire a stake in the equity of the company being purchased.

Mortgage bonds

Mortgage bonds are issued by a dedicated bank (Pfandbriefbank) whose authorization to do such stems from BaFin, Germany's national financial supervision commission. In awarding such permits, BaFin employs the country's Mortgage Bond Act (Pfandbriefgesetz—PfandBG). Mortgage bonds are an especially secure investment, as they always have an adequate amount of coverage. This is comprised of mortgage-based receivables accruing to the mortgage banks from either the public (in cases of public sector mortgage bonds) or private sectors. The latter class of receivables include those bonds secured by encumbrances on real property (through dedicated mortgage bonds) and on ships (through ship mortgages).

New shares

New shares are those issued in conjunction with a company's increase of capital. These shares are generally cheaper than those preceding them, and are offered to either existing shareholders or—should their exclusion have been resolved—to new investors. It is only in cases in which existing shareholders do not exercise their rights of procurement that the new shares are offered on stock exchanges.

Operational Risk

Losses possibly arising from defective internal processes, human errors, technological failures, and events outside corporate control.

Partial execution

“Piecemeal” execution of the sale or purchase of securities. Such operations are no longer carried out on such stock exchanges as Munich, as these practices often give rise to higher costs for investors. Xetra, the electronic trading system, does allow such partial executions, in cases in which the offsetting offers are not large enough, or in which the mathematics of the situation so dictate.

Participation certificates

These hybrids have elements of both shares and bonds, and are not to be categorized as being either a company's own or outside capital. PCs are generally issued by joint stock companies. They assure the investor of receiving at term all of his or her nominal capital plus interest. The latter's amount depends, as is the case with dividends, upon the profits earned by the company. The investor also generally participates in the losses suffered by the company. In most cases, and by way of compensation, investors receive supplemental payouts in high earning years. Participatory certificates are not classified as being securities governed by trading regulations.

This means that companies are free to constitute them according to their needs and wishes. The PCs do not bear voting rights at AGMs. Should the issuing party be insolvent, the PCs enjoy only subordinate rights of service. This generally means that holders of PCs do not receive any recompense in such cases.

Portfolio

A portfolio is the final result of the process of asset selection. This process should be conducted on an in-depth basis, so as to be optimally attuned to the investor's personality, and to his or her needs and wishes vis-à-vis gain and risk. This process should avoid asset correlation.

Rating

Evaluation of the creditworthiness of financial securities (rating of issue) or of debtor (rating of issuer).

Return

The yield achieved by the investment. There are two kinds of return—pre and post-tax. A useful rule of thumb states: the higher the return, the higher the risk.

Return on equity (ROE)

Key indicator depicting the ratio between either net income for the year or a form of pretax income (such as earnings prior to taxes) and the average equity for the year. The ROE thus indicates the efficacy of the use of the capital supplied by the company or by its owners.

Risk controlling

is the process undertaken by an independent body on an ongoing basis of calculating and monitoring risk; of developing the methods used in doing such; and of employing these in the compiling and reporting of analyses of risk.

Risk management

The incorporation of considerations of risk into the management of business portfolios.

Risk-adjusted pricing

To assure themselves of achieving an adequate rate of return on equity employed in classical banking transactions, banks set margins (interest rates) in ways accounting for the level of risk exposure associated with their loan recipients. The rule of thumb: the lower the customer's creditworthiness, the higher the rate of interest demanded.

Risk-weighted assets

Risk weighting is employed to depict the → credit risks arising from the variations in creditworthiness displayed by the issuers and business partners responsible for the items forming the banking book. This weighting is done to satisfy the requirements of the financial supervision system, and is applied to assets listed on balance sheets, to off-balance sheet transactions (such as loan sureties and guarantees rendered for balance sheet items), to forward contracts, to swaps and to option rights. The rating is determined by the class of creditworthiness accorded to the respective issuer or business partner. Principle I states that such assets require backing comprised of liable equity and amounting to 8% of the value of the transaction (see the item on risks appearing in the trading ledger → market risk positions).

Securitization

Securing of financial funds through the use of securities as backing for transactions, or through the transformation of such receivables as loans. The primary objective of such operations is to make such receivables capable of being traded on organized capital markets (such as stock exchanges). The provider of capital (= creditor) is the acquirer of the securitized receivable. It thus assumes the risk arising from fluctuations in prices prevailing for the security on the markets, and from loan default. The capital acquirer (= debtor) has to provide proof of its creditworthiness. This is done by rendering, on a regular basis, reports and securing as high a rating as possible from a dedicated agency.

Share

By purchasing a share, an investor acquires a portion of the capital of a joint stock company, thus making him or her one of the company's owners. Shares provide investors with two ways of realizing gains or experiencing losses: through the appreciation of their shares and through the receipt of dividends disbursed on an annual basis by their companies; or, conversely, through falls in share value (till the point of nonexistence) and through the failure to disburse. Adding share appreciation and dividend payouts yields the return on shares. The most common kind of shares in Germany is ordinary ones. These entitle their shareholders to participate--in a commensurate way and at least once in a year at the company's Annual General Meeting--in the reaching of decisions for and by the company. The rule that each share bears a voting right gives investors holding large numbers of shares a great deal of influence in the running of the company. Investors willing to dispense with voting rights can acquire preference shares, which make up for their lack of such rights by offering dividend payouts greater than those accruing to holders of ordinary shares. A company wishing to raise capital directly from its shareholders issues name shares. Issued in other cases are bearer shares. These entitle the possessors of the shares to all rights of their use, with these including their loaning.

Shareholder value

In widespread use among managers running corporations in the USA and the UK, the process of benefiting shareholders by achieving results--“increasing company value”--enabling the paying out of large-sized dividends and causing company stock to rise.

Spread

Premium/discount on a reference rate of interest; also the difference between purchasing and selling quote of a security.

Squeeze-out

The process of using cash payoffs to force out small-scale shareholders from a company. In Germany, this process is permissible for those shareholders holding 95% of a company’s stock.

Stock exchange

Exchange for the trading of securities. In the 1990s, such exchanges went from being in-building trading floors, upon which stock dealers and brokers called out their orders, to being computer-driven electronic platforms.  Stock exchanges are owned and operated by such public sector entities as chambers of industry and commerce, or are normal joint stock companies. In addition to the Frankfurt Stock Exchange, Germany has regional-level exchanges in Berlin, Düsseldorf, Hamburg/Hanover, Munich and Stuttgart.

Subprime crisis

This crisis started gripping the world's banks in mid-2007 and soon spread throughout the financial world. It was triggered by drops in the prices of real estate in the USA. This led to defaults by recipients of mortgages. These loans were primarily in the subprime segment—a term used to designate loan recipients of low creditworthiness.

Sustainability (ethical or green) funds

Funds whose investments are governed by ethical and ecological criteria. Investment companies now offer all kinds of such funds. These include funds investing solely or partially in stocks, as well as those specialized in private equity placements. The Sustainable Business Institute (SBI) maintains more than 270 such funds and more than such 2000 stocks on its online platform. Not all funds divulge their criteria of selection. This means that investors have to exercise special care when making their picks.

Sustainable management

A component of a corporate strategy designed to exploit the opportunities and avoid the risks resulting from economic, ecological and social developments, and thus to sustain → Shareholder Value on a long-term basis.

Synchronization date

Deutsche Börse AG 'resynchronizes' its indices on the third Friday on the final month (March, June, September and December) in the quarter. This entails adapting the values incorporated into the calculations used in configuring the respective index to account for its current line-up. This involves resetting the factors of correction forming part of the formula of index calculation's being reset to be 1. Also undertaken is the taking account of all changes in capital stocks and all dividend payouts which occurred between the dates of synchronization. To avoid discontinuities in the index, the recalculated values presented in it are multiplied by a factor of synchronization. The bases of the synchronization are the closing quotes on the date of synchronization.

Syndicated loans

Large-sized loans issued by consortia of banks. → Syndication (the forming of such consortia) enables the spreading of loan-related risks among two or more banks.

Syndication

The issuing of loans (→ syndicated loans) or securities (bonds and shares) by a consortium.

Trading supervision

Germany's Securities Code stipulates that each stock exchange has to set up a proprietary trading supervision body (TSB) whose most important responsibility is monitoring the setting of quotes for securities traded on the exchange. The TSB operates independently and is thus not subject to influence by the exchange or by another parties. The TSB is responsible for tracking and evaluating each and every transaction undertaken at any time on the exchange. Its powers of policing entitle the TSB to carry out investigations, with these encompassing searches of premises. To assure a country and international-level monitoring of investors, the TSBs exchange data among each other.

Value drivers

Areas of business largely responsible for driving up the value of the company as a whole.

Warrants

Financial instrument derived from an underlying asset (for instance: a stock). Warrants enable the investor to acquire a share at a preset time and at a preset price. Such warrants permit investors to ‘bet’ on movements of the underlying asset. Warrants taking an option on rising quotes are called “calls”. Their converses are called “puts”. Warrants are traded on stock exchanges and can thus be purchased or sold at any time during their term. These instruments are highly risky, as there is no certainty of not losing all your investment.

Withholding tax

Such taxes are withheld directly at the source of income—as, for instance, capital gains and wages. To keep matters simple, the final withholding tax is withheld by the bank maintaining the customer's securities account. The bank then directly transfers the taxes to the respective authorities.